Post-secondary education is becoming increasingly expensive. Many students are simply unable to cover the full cost on their own, even despite working summers and part-time jobs during the year.
If you have children, grandchildren or know of another young person you would like to help, this section will guide you in investing for the education they need.
Tax-sheltered growth plus a lower tax rate:
How an RESP works
An RESP provides two significant tax benefits which non-registered accounts lack.
First, all interest, dividends and capital gains generated by your investment are allowed to accumulate tax-free, resulting in faster growth. Second, when the growth portion is withdrawn, it is taxed in the students hand and at his or her tax rate - not yours. Since most students have much lower incomes than their parents, this "income-splitting" technique should result in significant tax savings and helps maximize the funds available to pay for post secondary schooling.
RESP growth can only be withdrawn to pay for post-secondary expenses of the student(s) named as beneficiaries under the plan. However, the contributions made, which are not tax-deductible, may be withdrawn tax-free at any time.
Maximum annual contributions of $1,500 per year can be made for up to 21 years, for a cumulative maximum of $31,500. All funds in the plan must be withdrawn before the end of the plan's 25th year.
Following the February 1997 federal budget, RESPs have become a more attractive education savings vehicle, as some constraints with regard to withdrawing income from these plans has been eased.
Under the new rules, if none of the named beneficiaries of the RESP go on to post-secondary education by age 21, and the plan has been in existence for ten years or more, the contributor will be allowed to withdraw the growth portion of the plan (that is the income earned from the contributions, whether it be interest, dividends or capital gains income) and transfer it to his or her RRSP, or his or her spouse's RRSP. The contributor can transfer up to $40,000 of the growth portion as long as he or she has sufficient unused RRSP contribution room. If the RESP income cannot be fully offset by an RRSP transfer, a tax of 20%, in addition to regular taxes will be applied to the excess withdrawal.
Individual vs. Pooled RESPs: A closer look
There are two types of RESP's available to investors.
Individual RESPs give you significantly greater control and flexibility than pooled RESPs in a number of key areas.
Individual RESPs, are generally considered superior because they give you significantly greater control and flexibility in areas such as investment selection, naming beneficiaries and making contributions and withdrawals.
Pooled RESPs, do not allow you to decide on how our savings are invested. They also involve various restrictions - which vary from plan to plan - which significantly increase the chance that growth earned will be forfeited and divided among the other children in the pool. Such restrictions can included: having to name beneficiaries under a given age (usually 13) and not being able to interrupt your contribution schedule or access you accumulated contributions. There can even be restrictions regarding how education payments must be received and on academic standards at the post-graduate level.
Individual RESPs are not subject to such constraints. The only way the growth portion of your plan can be forfeited is if your child does not go on to study at the post-secondary level.
How an independent financial advisor can help
Although an individual RESP offers valuable benefits. How well your plan meets your individual needs will be determined by the quality of the advice you receive, both when you set the plan up and in the future. With so much riding on a good education - and on your decisions - it is vital that you get sound advice on all aspects of your educations savings and investment program whenever you need it. The source of this advice for hundreds of thousands of Canadians is an independent financial advisor representing a mutual fund dealer, investment brokerage or financial planning firm.
There are many complexities invloved in all areas of personal financial planning. Selecting a good investment product can be a challenge to many of us. Ensuring that a good investment is also an appropriate investment, in terms of balancing risk and return to meet your personal appetite for performance and volatility, tax consequences where appropriate and ensuring the investment selected fits within a broader financial plan is an added challenge.
