Types of RESP: Choosing the Best Plan for Your Child’s Future
It’s important to secure your child’s future by planning for their education. Registered Education Savings Plans (RESPs) in Canada are a tax-advantaged way to save for post-secondary education. There are many types of RESPs, so you should select one that is best suited for your family. In this article, we explore the options available through the RESP, what benefits it can gain, and factors to consider when choosing a plan.
What is an RESP?
A Registered Education Savings Plan (RESP) is a government-registered account to help parents, guardians, and families save for a child’s post-secondary education. Contributions are tax-free, and the government offers additional incentives, such as the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB).
Types of RESPs
1. Individual Plans
Who it’s for: One beneficiary who does not necessarily need to be related to the subscriber.
Features:
- Flexible contributions.
- Appropriate for parents saving for a single child or those contributing to a non-relative’s education.
- Many investment options can be tailored to your needs.
Considerations: Transferring the plan to another child is impossible if the beneficiary does not pursue post-secondary education, as it involves penalties.
2. Family Plans
Who it’s for: Appropriate for multiple beneficiaries, who must be related to the subscriber (sibling, cousin).
Features:
- All named beneficiaries can share the contributions.
- Best for those families with more than one child.
Considerations: Beneficiaries of such a plan must be under 21. Unused grants for one child can be allocated to others within the plan.
3. Group Plans
Who it’s for: Individuals who want to pool contributions with other subscribers.
Features:
- Contributions are pooled and managed by an organization.
- Lower investment decision requirements and structured payment schedules.
Considerations: Less flexible than family or individual plans. Penalties or loss of earnings may occur if a beneficiary does not attend post-secondary education.
Benefits of an RESP
- Tax Advantages: Earnings within the RESP, grow tax-free until withdrawn.
- Government Grants
- CESG: The government matches 20% of contributions to a Registered Education Savings Plan (RESP), up to a maximum of $500 per child per year, through the Canada Education Savings Grant (CESG).
- CLB: More funding for low-income families.
- Flexibility: Pick investments that suit your risk tolerance and goals.
How to Choose the Right RESP
The RESP you choose depends on your family’s unique circumstances. Consider these factors:
- Number of Children: A family plan is probably the best if you have several children.
- Relationship to Beneficiary: Only family plans allow multiple related beneficiaries.
- Flexibility: With individual plans, you have a little more control over investments.
- Risk Tolerance: Those who like structured contributions but have limited investment flexibility may prefer group plans.
Conclusion: Secure Your Child’s Future
Choosing the right RESP maximizes your financial benefits while preparing your child for education. Go through your options carefully, taking into account what your family needs, and consult an advisor who can give you personal advice on how to proceed. Additionally, involve your child in talking about their educational aspirations to create a shared vision for their future. This can give you extra motivation to make sure you are using your RESP funds as best as possible.
Keep in mind that you should review your plan from time to time to make sure it matches changing family conditions or new government policies.
Invest in your child’s future today!