For good reason, families are often relieved to learn about programs such as heritage education plans with the Registered Education Savings, which can help them prepare financially for their child’s education. Most people, however, only know the basics, and it’s important to understand that how you handle contributions and withdrawals can affect how much money you get, how much taxes you pay, and how many fees you get stuck with. The following attempts to explain things a little more thoroughly.
1. Consider Who Is Opening the RESP
Some people will recommend that the youngest parent open the heritage RESP account so that it can stay open longer. If you wind up needing to close the plan, you can potentially transfer the RESP funds to a Registered Retirement Savings Plan (RRSP) tax-free, but you can only do that if you are under 71 years of age.
2. Know How to Maximize Your Grants
Government grants can add thousands of dollars to your RESP, but grant contributions are limited, and they are based on the contributions that you make yourself.
The Canada Education Savings Grant (CESG), for example, contributes 20% of your annual contributions up to $2,500, and lower-income families, sometimes, get a higher percentage. It’s important to know how much you are eligible for and strive for the contribution limit without going over (over-contributing can result in a fee). Families often get assistance from family and friends to maximize their grants, but you will often have to contribute a little bit at a time, rather than one big deposit.
3. Watch for Extra Charges and Fees
There are also some fees associated with the Registered Education Savings Plan. Set-up charges, enrolment charges, and annual administration charges are just some examples. Not every institution will charge for these things, so it’s often wise to look around until you find the best provider.
4. Strategically Withdraw Your Funds
Your goal is to get the money out tax effectively, but when it comes to withdrawals, there are some rules and complexities that you should learn about.
Grant money and investment growths are taxable to the beneficiary through an educational assistance payment, or EAP, but withdrawing your contributions is tax free. The idea is to structure your withdrawals in a way that minimizes taxes, and sometimes it helps to work with an advisor. If done correctly, students could pay little to no tax.
5. Empty Your RESP Near the End of Schooling
The heritage RESP provides funding only while your kids are enrolled in school, and withdrawals made after graduation are subject to additional rules, which sometimes means for taxes. Often, the government will take back grant money if it isn’t used during your child’s time at the university, so it’s wise to use these effectively. If you are unable to use them for your child’s university, you might transfer the funds to a sibling or relative. There might be other options, but it’s important to do your research and make sure you understand all of the expectations and limits.