Parents leave no stone unturned to secure their child’s future. They hunt for various savings schemes meant for children in pursuit of this. While there is no dearth of child plans in Canada, most parents choose Registered Education Savings Plan (RESP).
This plan allows parents or grandparents to save for their child’s post-secondary education. Moreover, they get tax benefits and government contributions through this plan. However, RESP has certain limitations, such as capped annual contributions and complex enrolment terms.
More flexible plans such as Child Plan come into play to bridge this gap. Whether your child pursues their higher studies or not, Child Plan secures a child’s financial future in any situation. To know more about this popular alternative to RESP, check this article.
What is RESP?
Canada Government-sponsored Registered Education Savings Plan (RESP) encourages parents, grandparents, or guardians to save for their child’s post-secondary education. For children under 18, the Government matches 20% of the contribution made to RESP through the CEGS grant.
The savings in an RESP account are tax-free if utilized for a child’s post-secondary education. However, contributors are not eligible for tax deductions on their investment in this scheme. Contributors can be anyone, whether a father, mother, grandparent, or relative.
Although several accounts per child are allowed, the combined contribution from all RESP accounts is capped at $50,000.
What can an RESP grant be used for?
RESP grants can be used only for the child’s future post-secondary education. Your child becomes eligible for Educational assistance payments (EAPs) from the RESP after enrolling in post-secondary education. The EAPs are a combination of investment earnings and CEGS grant contributions. EAPs can be used to fund your child’s post-secondary expenses such as tuition, books, and transportation.
As these are payments made to children, it is taxable in your child’s hands. However, most children have little to no income. Therefore, the tax becomes almost negligible for them.
Qualifying programs that an RESP can be used for
The official website of the Government of Canada states that savings and Grant money in RESP can be used for:
- Whether it is full-time or part-time, any post-secondary program in Canada lasts for at least three consecutive weeks.
- A full-time post-secondary program at a university outside of Canada lasts for a minimum of three weeks. If not a university program, then the program should be offered for at least 14 weeks by another training institution.
Eligibility of an Institution for the use of RESP
Particular Government approved Canadian Educational institutes are eligible for the use of RESP grant money. Similarly, you can call 1-866-517-5650 or the provincial student loan office to verify an educational institution that does not feature in this list.
Generally, the following educational institutions are eligible for the use of the RESP grant.
- Institutions certified by the Minister of Employment and Social Development.
- Trade schools
A child can use RESP money to fund their post-secondary outside Canada in any university, college, or other educational institution. The Government provides a specific list for eligibility for an educational institution outside Canada. However, the program duration should not be less than 13 consecutive weeks (3 weeks for university programs).
What happens when the child doesn’t continue education past high school?
If your child doesn’t continue their education after high school, you can choose one of the following options:
Leave the money in the RESP
An RESP can be left open for up to 36 years. So, keep the RESP plan open as the child might decide to continue education past high school
Replace the beneficiary
- In the case of an individual plan, you have the chance of replacing the beneficiary and naming another child.
- In the case of a family plan, earnings and some federal and provincial grants can be used to fund another child’s education.
- In the case of a group plan, check with the plan provider if you could replace the beneficiary without paying any charges.
Transfer the money to RESP
The earnings of up to $50,000 can be transferred tax-free from an RESP to your RRSP when:
- RESP plan has been open for at least the past ten years,
- All beneficiaries are aged 21; currently not pursuing education past high school,
- RRSP has room for money,
- You are a Canadian resident, and
- The rules of your RESP plan allow it.
Close the RESP
In case you opt for closing the RESP, this is what happens:
- Your contributions are yours, so you get to keep the money without paying any tax on your contributions,
- All remaining grants and bonds must be returned to the Government (can only be used to pay for post-secondary education),
You may get investment earnings out when:
- The plan has been open for at least ten years and
- All beneficiaries are at least aged 21 years; currently not pursuing education past high school.
Child plan: The best alternative to RESP
Although RESP is a popular child-saving option in Canada, it is plagued by several limitations and complex terms. On the other hand, Child Plan, a “Participating” Whole Life plan, is getting popular in Canada amongst parents and grandparents. This plan is not limited to funding a Child’s post-secondary education, instead offers endless benefits for both parent and child.
Furthermore, parents can open a Child Plan “Participating” Whole Life insurance plan for their child as early as 14 days after birth. The enrollment process is easy and comes with an option to personalize the Child Plan. Some highlights of the plan are:
- Fund higher Educations
- Down payment on a first home
- Fund their first startup
- Annual tax-free dividends for life
- Doubles as an education fund
- Tax-free money growth from day one
- Transfer the amount to your child, tax-free, anytime after they turn 18.
- It includes permanent whole life insurance for your child.
Due to its additional coverage and returns is often termed the “Ultra pro” version of RESP.
Although an RESP account is a powerful tool to secure your child’s future post-secondary education, it is too traditional for some parents. Moreover, RESP is only linked to the educational future and doesn’t cater to other future liabilities of your child.
Here comes the importance of more flexible plans such as Child Plan™. This all-in-one plan not only secures your child’s life but can be used for any financial needs. Further, you can also personalize the Child Plan according to your future goals. In conclusion, whatever plan you may choose, it is advisable to start early to get the maximum benefits in the future.