RESP – FREE MONEY
Registered Education Saving Plan (RESP)
I was working at a client’s house and somehow the topic of RESP’s came up. He/she mentioned they don’t like mutual funds and keep their kids school savings in a savings account. They explained that they won’t lose any money in the market that way. I started to tell them how right now inflation is killing them. I don’t know any savings account paying more then .5% at the moment. They are also missing out of the government rewarding you for saving for the beneficiary’s schooling.
The government will grant you $500 for each $2500 you put in per kid per year. Yeah that’s a 20% gain!
Your kid/kids probably wont be attending post secondary school for 15-20 years from now. So if the market does go down chances are it will recover before then. As your kids get near the age where you feel you will start withdrawals switch to a more conservative investment.
Anyways more on RESP’s, from what I understand the lifetime grant per beneficiary is $7,200. That means if you max your $2500 per year after 15 years the government wont pitch in anymore.(by that time tho you should be o.k) There is a maximum contribution of 50 thousand per kid. You can do it all the first year but the government will only throw you $500
Say something happens and you didn’t toss the full $2500 in one year. The government will allow you to carry over unused contribution room but they will only allow one previous year’s worth of contributions to be used each year. Also keep in mind the contribution limit was only $2,000 prior to 2007.
Can You Withdraw For Personal Use?
The money you put into your RESP has already been taxed, so you can withdraw that money at any time without penalties. All the government grants and interest you made over time will be taxed at the students tax rate. (which should be low as they are in school) If for some reason your kids don’t need it, you can pull it all out. Again all your contribution $$$ you put in would be tax free but the interest and grant money will be taxed at your tax rate plus 20%.(govt wants their grant money back) Keep in mind, RESP accounts can remain open for 36 years. So you may not want to close the account, maybe later on they will want to return/go to school.
There are many resp accounts out there and you can even buy your own stocks in the fund. Personally I have been debating switching to my own portfolio to eliminate management fees. The wife prefers the mutual fund we are currently with for security. This is one I don’t want to “trump” because if the market crashes and I lose a nice percentage of our sons RESP, she wont be happy (even if its short term). So screw it, I want her to be happy.
Also if you have more then one kid you can setup the RESP family plan and divvy the RESP between them.
Anyways these are the basics and Ontario may be different from other provinces. Either way the government will happily take your money whenever they can, why not get some back?
For more information check out the Government of Canada site on RESP’s
Government of Canada RESP