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The $$$ Maker
Report
Bi-Monthly Investment Newsletter by Karl
Jung, CLU
SEPT/OCT, 2011 |
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Gibsons Office: (604) 886-2691 |
Cellular: (604) 760-9899
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Fax: (604)
886-3014
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90 Monroe Road,
Gibsons, BC V0N 1V6 |
e-mail: kjung@dccnet.com
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Everything you
need to know about RESPs
In the last two decades, tuition and supporting
educational costs in Canada for the average student has more than tripled.
While our expenses are not as excessive as our American neighbours, they are
trending higher annually. Students going to school this fall can expect to pay between $10,000 - $15,000 per year for a four-year university degree.
Pooled educational plans have been available for decades for Canadians looking to help fund a post-secondary education for their children or grandchildren. However, they were never embraced by the public as much as they could have been because of restrictive features on their contracts. Many parents were just not willing to enter into the fixed deposit schedule as the pooled plans demanded.
1998 marked the introduction of Canadian Educational Savings Grant (CESG), which allowed subscribers to gain the 20% government grant. RESPs now became more widely accepted as more banks, Credit Unions, life insurance companies and brokerage firms entered the market. 2007 was the year the rules were given even more favourable parameters and increased deposit limits.
Here are a few features to help guide parents and grandparents towards funding an educational program.
What types of
plans are available?
Individual
Plan
- Designed for one beneficiary only, who can be either a family member or a totally unrelated third party.
- The beneficiary can be replaced by another child and still retain the CESG, but only under certain situations.
- Full control over investment options range from simple Daily Interest Savings Accounts & GICS, to Mutual Or Segregated Funds and individual stocks.
- Contributions can be made monthly, annually or even as a one-time deposit. There are no contractual obligations to the subscriber.
Family
Plan
- Designed for related family members where multiple children are put on one plan.
- The accumulated deposits and growth can be shared between the children either equally, or any other percentage. Thus, if two children are involved and one child does not go on to further studies, the proceeds can be used exclusively for the second child.
- Beneficiaries can be added or removed at any time, however, all beneficiaries must be related (children, grandchildren or adopted children). Unrelated 3rd party children are not eligible.
- Same investment and deposit features as the Individual Plan.
Pooled
(or Group) Plans
- Organizations like the Canadian Scholarship Trust Foundation or the Heritage Education Funds offer programs where contributions are combined (or pooled) with thousands of other depositors.
- Annually, they deem an amount that is distributed to children pursuing a post-secondary education, however, neither the dollar amount nor the number of beneficiaries is guaranteed in advance. It is left to the discretion of the Trust to decide annually what should be paid out.
- The investment inside the Trust tends to be fixed-income products like GICs, bonds, mortgages and debentures, thus limiting their growth in years where stock markets surge.
- Designed for regular fixed monthly or annual deposits through the signing of a contract, and tend to be very inflexible.
- Many have onerous fees & penalties for those who stop contributing or wish to withdraw their money before maturity.
How much can be
contributed?
Up until 2007 the amount was $42,000, but it has now been raised to $50,000 per child. In prior years the maximum amount was $4,000 annually, which represented two years of $2,000 each. Parents were allowed to make two years of deposit within one calendar year. This has now been eliminated, however, the 20% grant is only paid on the first $2,500 (or $5,000 if two years are made at once).
The contributions are not tax-deductible, however, they grow tax-deferred until withdrawal. Assuming the child continues with plans for further education, the growth and the CESG are taxable in their hands when withdrawn.
How the does the grant work?
The lifetime maximum the government will give under the CESG program is $7,200 per child, which requires a deposit of $36,000. However, the grant is limited to $500/year (20% of $2,500), which allows parents to put in two years worth of contributions, thus bringing the total grant to $1,000 on a $5,000 deposit.
If the child does not go on for further studies, the grant must be repaid unless it is rolled-over to a qualifying sibling who has available grant room.
Low-income families that are below a certain threshold are eligible for an enhanced grant of up to an additional $500/year.
The grant is only paid until the end of the year the child turns 17, and is dependent or one of two rules (a) a minimum of $2,000 was contributed before the year the child turned 16, and (b) a minimum of $100 in annual deposits were made in any four year before the child turned 16.
How is the money
withdrawn?
- Proof of registration is required for any withdrawal, however actual expense receipts are not necessary.
- The school must be on an approved list of post-secondary institutions of higher learning.
- A maximum of $5,000 can be withdrawn in the first 13 weeks, and after this date any amount can be withdrawn.
- If withdrawn under the rules of the program, the payments are taxable in the hands of the student. Note: only the growth and CESG are taxable; the original contributions can be withdrawn without tax consequences.
What happens if the
child does not pursue a post-secondary education?
Do not be in a rush to close the account. Some children may simply not be ready to pursue a formal education at age 18, but might be ready in their mid to late 20s.
Should it be decided at a later point in time that a return to school is unlikely, consider transferring the proceeds to another sibling. Be aware that limits are placed on the CESG and you cannot roll tax-free more than the original contributions and grant already received.
Should there be no other sibling to transfer the account to, the proceeds can be rolled into your RRSP, within certain limits. The beneficiary must be at least 21 years of age, and the plan had to be in place for at least 10 years. The maximum that can be rolled into the RRSP is $50,000, and can only be done if the person has enough RRSP contribution room.
If the above options do not work for you, you can withdraw the proceeds and simply pay back the CESG. The growth is taxable that year (along with a 20% surcharge), but the original contributions are withdrawn tax-free.
Finally, the last option is to donate the investment proceeds to an educational institute of your choice and receive an offsetting tax deduction.
What else is
available for young students?
Besides the Enhanced CESG, the Canada Learning Bond is available to low – moderate income families.
Alberta has the Alberta Centennial Education Savings Plan (ACES).
Parents with handicapped children are entitled to access the Registered Disability Savings Plan (RDSP).
Other articles worth checking out this month:
Gail
Vaz-Oxlade’s stupidest money blunders – Gail Vaz-Oxlade, Canada’s foremost Money
Maven, outlines simple, overlooked and downright dumb financial blunders we all
make but shouldn’t.
Forget
the market: We can’t afford to retire
– Not only are equities getting hammered with a four-week run of losses that
have led to an evaporation of $2.9 trillion in wealth, but now the market’s
getting blamed for grim forecasts about Baby Boomers staying in the workforce
longer and putting off retirement.
Back to a list of The $$$ Maker Report and related articles