4 Misconceptions About RESPs
How likely is it that you and your family would say “no, thanks” to an offer of free money?
Surprisingly, it’s more likely than many would think – at least, when it comes to Registered Education Savings Plans (RESPs). An RESP allows families to put money aside to grow, tax-sheltered, for their children’s post-secondary education.
The “free” part is the generous grant program through which the Canadian government, and some provincial governments, add to the account. But, according to 2016 Annual Statistical Review from ESDC, 51.1% of eligible children have collected CESGs. That means almost half of eligible Canadians are not taking advantage of this opportunity to get money from the government!
“It might be because people are just not aware of the grant program and all the advantages of RESPs,” said Peter Lewis, Vice President of Canadian Scholarship Trust Foundation. The CST Foundation was created in 1960 and has been helping parents save for higher education for over 57 years. The Canadian Scholarship Trust Plans offered by the CST Foundation are managed and distributed by CST Consultants, one of Canada’s leading RESP distributors.
Lewis also noted that RESPs have evolved significantly over the years, resulting in a number of misconceptions that may cause families to shy away from them. “And that’s really too bad, because there is no better way to save for higher education than in today’s RESP. The way the cost of higher education is rising, our children are really going to need that financial help,” he added.
An RESP is a tax-deferred education savings plan to which the federal government contributes through its Canada Education Savings Grant (CESG). The CESG matches 20 percent of the first $2,500 contributed to the RESP each year, though you might qualify for more depending on your family income, to a lifetime maximum of $7,200 per child. You can set up an individual plan for one child or a family plan for siblings, so more than one child can benefit. Plans can be set up at most financial institutions, or through RESP experts like CST Consultants.
Here are four common misconceptions about RESPs:
- One cannot afford to save in an RESP
The notion that one cannot afford to save in an RESP is far from the truth. The reality is that one can start an RESP with a very modest amount – whatever works best for their budget. Also, Canadian families with lower incomes may receive the Canada Learning Bond (CLB) each year they qualify with no contribution requirement. There is also flexibility built into RESPs, such as the fact that RESPs can remain open for up to 36 years.
- If the child doesn’t go on to post-secondary you’ll lose your money
False If your child decides not to get a post-secondary education, an RESP gives you several options including simply transferring the plan to another child or boosting your RRSP with the income in your account (conditions apply).
- An in-trust account accomplishes the same thing as an RESP.
Nope. An in-trust is not as advantageous as an RESP in that the contributor is taxed on interest and dividends and the child is taxed on capital gains on an annual basis. While it may appear that an in-trust account has a lot more flexibility as the child is entitled to the funds upon reaching the age of majority, and can use them for any purpose, an RESP is actually a simpler option to set up and gives you access to the education savings grants from the government.
- RESPs are only good for university and college programs.
Nope – this isn’t the case. An RESP can be used to pay for any post-secondary education program recognized under the Income Tax Act (Canada). This gives a child the freedom to choose any program in a qualified educational institution they want. Recognized institutions range from community colleges and universities to vocational, technical, trade and religious schools – domestic and international. Correspondence courses are eligible too. New schools and programs are being evaluated all the time and the government of Canada posts the list on their website.
Getting the details right is important, and it’s one reason why many prefer to have an organization like CST Consultants, who deals exclusively with RESPs, set up and manage their savings, Lewis said, adding: “People shouldn’t let misconceptions stop them from saving for their children’s education.”