My kids are 18 and 20, does setting up a new Registered Education Savings Plan (RESP) still make sense?
A new client asked if it still made sense to set up a new RESP for his kids, who were aged 18 and 20.
His ex-spouse already had an RESP for the children, but he wanted to know if he could still set up a new one. This is a good question because RESP rules are confusing.
The last age children can receive the grants is the year they turn 17, so in his situation, it didn’t make sense to open a new plan.
Also, only the subscriber of an RESP can claim funds back if they are not used for education. Since he is not the subscriber, he should not contribute to the existing RESP
Special rules for beneficiaries who are 16 and 17.
It should be noted that to get the grants for children who are age 16 and 17, you must have contributed $2,000 to the RESP in the year they turned 15, or make a minimum annual contribution of $100/year for 4 years prior to the age of 15.
For further information, see the below links:
- RESP: Important Estate Planning Tips
- What to do when education savings need a boost
- How to make tax-smart RESP withdrawals
- Saving for your kids’ education? It may cost more than you think
- Information about RESPs from the Government of Canada
Excerpts from the Book – Preserving Wealth – written by Jack Lumsden, MBA, CFP®
“Knock it off. Alice doesn’t have a monopoly on research. Anyway, here’s the scoop. There’s a federal program out there called a Registered Education Savings Plan (RESP), and there are two basic types.
“The first type is where you have your own self-directed education trust plan. You would make the investment decisions (such as a mutual fund) and name a beneficiary, which can be changed if it is a blood relative. You can contribute up to $2,500 per year, or a lifetime total of $50,000, for each child. There’s no immediate tax benefit or deduction like an RRSP when you make the contribution, but the money in the plan can grow tax-free, and you get a 20 % grant on the contributions, to a maximum of $7,200 lifetime. There are also some other benefits, depending on your family income.
“So within the plan, you’ll have your contributions, the grant, and growth. When the grant and growth is taken out, it’s taxed in the hands of the child, which is normally in a lower tax bracket. Contributions are removed with no tax. If one child doesn’t use the RESP, another child can use it. In the worst-case scenario, if no one can use the RESP for post-secondary school, you would get your contributions back tax-free. You have to pay back the grants, and you have to pay tax on the growth when redeemed, or rollover tax-free to your RRSP if you have room.
“The other type of plan is a single plan with a multitude of subscribers, often called a scholarship trust. In this plan, those who don’t go to university lose their contributions and pay for those who do, so I would not recommend using these types of plans.”
Uncle Wayne added, “With an RESP, if you and your wonderful spouses are joint subscribers and anything happens to one of you, the other can take over. If there’s only one subscriber, you may want to name a successor subscriber in your will so that the RESP can continue and won’t be collapsed in the estate.”
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®
For your FREE Copy CLICK HERE
Jack Lumsden, MBA CFP® Financial Advisor, Assante Financial Management Ltd.
The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances.
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For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring Wealth by Jack Lumsden, MBA, CFP® or schedule a call with Jack at 905-332-5503
Jack Lumsden is a Financial Advisor with Assante Financial Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. Please contact him at 905.332.5503 or visit www.jacklumsden.com to discuss your circumstances before acting on the information above.