Navigating the Complex World of Registered Education Savings Plans

Parents seeking to save for their children's post-secondary education face a multitude of challenges, including rising tuition fees and decreased government funding. One strategy to mitigate these difficulties is through the use of Registered Education Savings Plans (RESPs). Specifically, a group RESP can be set up through a scholarship organization, while a self-directed RESP can be established through an investment dealer, mutual fund, or trust company. However, it's crucial to weigh the pros and cons of these plans and consider alternative routes before making a decision.

Key Takeaways:

• The maximum annual contribution to an RESP is $1,500 per child, up to a maximum of $31,500, with the plan requiring winding up within 25 years.
• Earnings inside an RESP grow tax-free until withdrawn, with the funds becoming taxable in the beneficiary's hands, who will likely pay little to no tax.
• The drawback of an RESP is that income and capital gains accumulated in the plan are lost if the beneficiary fails to pursue post-secondary education, resulting in the contributor receiving only the principal amount back.
• Scholarship trusts, such as the Canadian Scholarship Trust Foundation, pioneered by the Canadian Scholarship Trust Foundation in 1960, involve contributors purchasing units at a set price, typically on a monthly basis.
• The money received by the plan is pooled and invested in conservative fixed-income vehicles, such as guaranteed investment certificates, mortgage-backed securities, and government bonds.
• Self-directed RESPs offer more flexibility, with fewer limitations regarding beneficiaries, changing them, or rules about the timing of withdrawals from the plan.
• The beneficiary of a self-directed plan can be a child, close friend, spouse, or even oneself, as long as they attend a post-secondary institution.
• If the beneficiary doesn't pursue further education, the contributor's capital is refunded, but all investment income goes toward an educational institution of the contributor's choice.
• Some companies don't advertise their self-directed RESP plans widely, and contributors must inquire about them.
• Mutual fund RESPs, such as Trimark Investment Management Inc. and Royal Trust, charge varying annual fees, depending on the investments chosen.
• Anthony Layton, chairman of the Canadian Association of Financial Planners, recommends RESPs as attractive planning tools for young parents, citing their ability to facilitate forced savings.
• Anthony Layton prefers self-directed RESPs due to their flexibility and clients' satisfaction with having control over investments.
• Janet Freedman, a Toronto fee-only financial planner, cautions that starting an RESP makes sense only if one's financial house is in order, with debts like mortgages and car loans paid off.
• Janet Freedman suggests saving for education through an unregistered investment plan, such as a mutual fund account, where there are no restrictions on investments or withdrawals.
• When setting up an unregistered plan, it's essential to understand the attribution rules under the Income Tax Act, which state that interest and dividend income earned by a person under 18 is taxable to the individual who provided the funds.

Statistics:

• The maximum annual contribution to an RESP is $1,500 per child, up to a maximum of $31,500.
• The plan must be wound up within 25 years.
• The Canadian Scholarship Trust Foundation pioneered scholarship trusts in 1960.
• Mutual fund RESPs charge varying annual fees, depending on the investments chosen.
• The Income Tax Act has attribution rules that state interest and dividend income earned by a person under 18 is taxable to the individual who provided the funds.

Sources:

• By SHIRLEY WON BY SHIRLEY WON Special to The Globe and Mail
• Canadian Scholarship Trust Foundation
• Scholarship Consultants of North America Ltd.
• USC Educational Savings Plan
• Trimark Investment Management Inc.
• Royal Trust
• Canadian Association of Financial Planners
• Anthony Layton
• Janet Freedman
• Income Tax Act