Know the ABC's of RESP's
Recently, we have received some calls on matters of which owners of RESP's should be aware:
1) Requirements to access money from RESP - To redeem money from the RESP for educational purposes, you will require "proof of enrolment", which typically is only available from the school's registrar office. This letter must:
. State that the student is enrolled full-time in a qualified educational program in the coming year.
. be on institution's letterhead and signed or certified by the office of the registrar or department head.
Most RESP carriers will not accept a single letter of acceptance, a tuition fee invoice or even proof of enrolment from the previous year.
2) What is the definition of "post secondary education institution"?
It can be any of these:
. university or college in Canada recognized under Canada Customs and Revenue Agency (CCRA)
. an educational institution certified by Human Resources Development Canada (HRDC) that provides courses other than those designed for university/college credits that will improve a person's occupational skills
. a university/college or other institution outside Canada that provides post-secondary school-level courses that run at least 13 consecutive weeks.
3) What is the impact of RESP's on Ontario Student Assistance Program (OSAP)?
. Simply put, an RESP set aside for a student is considered an asset of the student and thus will probably have a negative impact on the amount of funds received from OSAP.
Although the cost of a child's education may seem daunting, time is on your side. We can provide you with information about how you can start preparing for your child's or grandchild's education now.
An RESP can be a valuable tool to put money aside for your child's or grandchild's education. Virtually all full-time post-secondary education in Canada is eligible for funding from an RESP.
Just how much money will you need? Surveys show the average annual expense for post-secondary education - including tuition, books, room and board - is between $10,000-$12,000 in today's dollars. This means a four-year university program would cost about $40,000-$48,000.
Here's an example of what this might mean in the future (assume your child will be going to university in 15 years; assume a modest inflation rate of three per cent): Based on the average annual cost for university education, you might be looking at a cost of between $61,000-$72,000. Although the cost of a child's education may seem daunting, time is on your side, if you start planning today.
RESP tips:
a) start early and contribute regularly
b) talk to your financial security and investment representative and find out whether an individual or family plan is best for you
c) take advantage of carry-forward grants available from the federal government through the Canada Education Savings Grant (CESG)
d) don't withdraw your RESP contributions early - let them grow for the children
e) consolidate your RESP's
f) understand the difference between "pooled" and individually-funded RESP's - there are considerable differences
g) have a back up plan if your child(ren) decide not to attend university.
As you may know, RESPs are a popular way to save for higher education - probably because they offer a terrific combination of tax savings and an annual government grant. Each year, RESPs rules allow you to contribute up to $4,000 per child (called the "beneficiary"). This means you can contribute up to a total of $42,000 per child.
The Canadian Education Savings Grant (CESG) makes this investment even more attractive. The federal government will contribute a grant equal to 20 per cent of the first $2,000 of your annual contribution. This means you could be eligible for a grant of up to $400 per beneficiary, per year. The monies invested will be in a mutual fund RESP
RESPs offer two significant tax benefits which aren't available through regular savings. First, your RESP will grow tax-deferred . Because no dollars go towards paying taxes at this stage, all of the money remains in the plan where it can generate more growth. The result? Your RESP will increase in value more quickly than a non-registered plan.
Second, when it comes time to withdraw the income from the plan to pay for your child's education, the beneficiary's tax rate may be low. This is because growth in RESPs is taxed at the student's tax rate. Since most students have much lower incomes than their parents, this "income splitting" results in significant tax savings.
If your child decides not to go to college or university, you do have some options - your money is not gone. They are a little complicated to recap here but call if you have some questions.
The material herein is provided solely for informational and educational purposes and is not to be considered as an offer or solicitation. Users are encouraged to consult with their professional.
Call us at 475-5109, toll-free 1-866-475-5109, fax 475-1581, e-mail info@lighthousewealth.ca. Be sure to visit our website at www.lighthousewealth.ca