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Friday, February 8, 2013

RESP’s – Advantages & Disadvantages

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If you own RESP’s (Registered Education Savings Plans), we at Duarte & Associates think that it is a great investment vehicle to provide for your child’s education and future IF your child follows through in going to college or university.  However, here are a few points that you might want to keep in mind.   If your child does not follow through and does not go to college or university here are a few things to keep in mind:
  • If your child does not follow through, the investment company in which you invested into your RESP’s will refund your contribution to the subscriber without consequence but not the interest earned on that money.  So in actual fact when you consider inflation you have lost money as opposed to making it.  Keeping in mind that if your child does not go through a secondary education, the only thing you get back is your contribution, and this is money that could have been invested elsewhere, earning a good rate of return.
  • Your maximum annual contribution to the beneficiary is only $4,000.00 and $42,000.00 for life, so in that note, if you wanted to contribute more due to the rising costs of education per year, you would not be able to. 
  • Another benefit of an RESP is the CSG (Canada Education Savings Grant), which pays 20% of the first $2,000.00 deposited into an RESP or $400.00 (or a lifetime contribution of $7,200.00) until the child reaches the age of 17.  Keep in mind that there are a lot of investment vehicles out there that pay more than most RESP’s and Government contribution combined on the return of your investment.
  • The good news is that assuming that your RESP is doing well and your child follows through in going to college your money is not tax deductible until the beneficiary withdraws it, and at which time the beneficiary usually has a much lower marginal tax rate.  The bad news is that it still is taxable.
Our solution is simple, because most people do not take advantage of their RRSP maximum head room, you can put the money either in a segregated fund in which historically has had a good rate of return, and then use the funds once the child has decided to go college, or if he/she decides not to go to college you can transfer the funds to your own RRSP not only on the contribution but on the compounded interest on the contribution or just simply put the money into a trust fund under your name where the child is a beneficiary.

by Carley Cooper

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