Education planning

Registered Education Savings Plans are not new to Canadians. There have been a number of legislation changes in the past several years that have made the plans more attractive to consumers. With the high cost of post secondary education and the huge burden placed on some students with student loans after they graduate - it is not surprising these plans are becoming very popular.

However, there are also some facts about these plans that you may not know if you get into financial difficulty.

Bankruptcy and RESPs

If you need to file for bankruptcy these funds are not an exempt asset – your Bankruptcy Trustee will be looking for you to either hand over the funds or purchase them back from your bankruptcy estate. The money in these plans is not “ in trust” for your children. Speak to a financial advisor or a bankruptcy lawyer about the difference.

Yearly contributions

You can contribute up to $4,000 per year, per child with a maximum lifetime limit of $42,000. The money deposited into these plans is not income tax deductible therefore any one can make the contribution. If you plan for your child to attend post secondary school these plans may make sense. RESPs are a good way to save for the children’s education without having to pay tax on the investment income that may be generated from the plan.

Who pays the tax

Well, the kids are going to pay the tax – the theory is that they will be making less money at that time therefore they will pay less tax on the investment income generated by the plan itself. This may or may not be a good deal - as who knows what the tax structure will be like by the time our kids need the money.

Grants

As a little incentive to use the programs - the Government of Canada is providing a savings grant of 20% of the first $2,000 you contribute to an RESP each year until the child is the age of 18 years. The maximum grant is $400 per year for a lifetime maximum of $7,200. If you cannot take advantage of the full grant in one year, you are allowed to carry it forward to future years, to a maximum of $800 per year.

Types of plans

There are two types of RESP plans, one is an individual plan and the other is a family plan – talk to a financial advisor about which one is best suited for you and your family. If you do decide to take advantage of these plans monitor the plan very carefully. If you contribute over $4000 per plan per year the penalty is 1% per month. Ouch!

Fees

Many of these plans have upfront fees and on going fees. So be sure to discuss the fee plan and completely understand the fee structure before you sign up.

What happens if the kids decide not to further their education

RESP contributions must be terminated by the end of the 26th from the start of the plan. If a child decides not to attend a post-secondary school, a different child can be appointed as the beneficiary of the plan, or the plan can be cancelled and the funds returned to the contributor, but a penalty tax of 20% is assessed upon the investment income.

Debt interest

Many of my clients over the years have had these plans for their kids and are very happy with them. However, if you are spending money to invest in a plan and using credit to live on then paying high rates of interest on your debts, you may want to rethink your financial plan, as I don’t believe this to be in your financial best interest.

Plan to become debt free first before purchasing any plan or at least pay down your debts quickly in conjunction with your savings plan.