Assistance with your children's current and future needs,
including education funding, setting up Inter-Vivos trusts, RESPs, and
University tuition in Canada increased by 152% over the last 10
In the Year 2015, They Say It Will Cost over $67,000 for an
REGISTERED EDUCATION SAVINGS PLAN (RESP)
What is an RESP?
An RESP is an education savings plan that grows
tax-free until your child is ready for post-secondary education. The plan
must be terminated by the plans’ 25th year following the year
in which the plan is entered into.
How RESPs Grow
This is what
happens to your money when you invest the maximum amount of $4,000 at the
begining of each year for only six years and let it grow at an average
annual compounding rate of return of 10% for 21 years - you will have about $145,000.
A $174 monthly contribution to a ‘CESG assisted’ RESP for 15 years at
10% compound return would provide $84,800.
What is Canada Education Savings Grant?
Effective January 1,
1998 the Federal Government will provide a Canada Education Savings Grant
(CESG) of 20% on the first $2,000 in annual contributions for children up
to age 18. The maximum annual grant will be $400 per child. Where else are
you assured at least a 20% return on investment? With another 10% to 15%
return possible from mutual fund investment, this could translate into an
annual return of 30% and higher.
What happens if the child does not pursue post-secondary
Our RESP plans are multi-beneficiary which allows the
option of designating another child. Also, if the plan has been running
for at least 10 years, and the beneficiaries are 21 years of age, you may
withdraw any unused growth from the plan and transfer it to your or your
spouse’s RRSP to a limit of $50,000 effective January 1, 1999 provided
contribution room exists. Any growth portion that cannot be offset by the
RRSP transfer will be subjected to an additional 20% tax over your normal
Can funds be withdrawn at any time?
Principal can be
withdrawn anytime tax-free, however, the allowable ‘contribution amount’
How are withdrawals taxed?
Only withdrawals of the growth
portion are taxable and are typically claimed by the child who typically
has little or no other income.
Does the maximum foreign content rule that applies to RRSPs also apply
Even though the RESP is registered, there is no foreign
What is the financial benefit of contributing to an RESP?
monthly contribution of $167 to a ‘CESG assisted’ RESP for 10 years would
provide over $39,185, assuming an annual return of 10%. Without the grant,
the RESP would provide $33,210, a difference of almost $5,975. Saving
outside an RESP, assuming a marginal tax rate of 40% would provide only
$19,926 a difference of over $19,259. Total contributions to the plan -
How does Pooled Trust RESPs like Canada Scholarship Trust, Heritage
Scholarship, Millenium etc. differ?
MoneyWI$E> Financial Inc. does
not associate with pooled trusts. While investments in these plans are
very secure, because by law, "Scholarship Trust Plans" investments must be
invested in interest bearing instruments like GICs, bonds, T-bills etc.,
they provide only modest long-term growth and may not always keep pace
with inflation (returns on this investment tend to be lower than mutual
funds over a 5-15 year period). Moreover, the plan must be opened before
the child turns 13. With some plans, money in the plan must be used before
the child turns 21.
We do not like pooled trusts also because
payouts to the students’ are governed by factors that client’s cannot
control (since it is based on the numbers of students participating in the
pool); up-front fees can be relatively high.
Also, with most pooled
plans, students must continue their studies uninterrupted. And with
others, there are no ‘partial’ scholarship payouts – if the client stop
investing at any point before the plan matures, he/she may receive only
the principal, less any fees or penalties. In less flexible plans, clients
may also forfeit the plan’s earnings (growth).
There are numerous other disadvantages to Pooled Trust.
THE ‘IN-TRUST FOR’ ACCOUNT
It is also possible to save for your
children’s future education costs and achieve significant tax savings
without an RESP through setting up an informal trust (‘In-Trust For’)
account and investing into an equity mutual fund. Although this type of
informal trust account is not fully tax-sheltered like an RESP, you will
be able to access the funds for any purpose at any time, not just to pay
your child’s education costs. More importantly, there is no annual
contribution limit to an ‘In-Trust For’ account.
You can provide an outright gift to your children of
cash, stocks or other investments. These are taxed differently and
attribution rules apply. Speak to your advisor to select the best strategy
available for you based on your situation.
You will not have to pay any fees to MoneyWI$E
Financial Inc. for us to provide the above mentioned advice if you
purchase a RESP mutual fund through us.