To continue our article from last week, we are talking about funding for your child’s education. In that article, we discussed what an RESP is, who can set one up and the various federal and provincial grants available to make it easy to save for your child’s future education.  In this article, we will discuss how to invest those funds and how to withdraw them when needed.
 
There are several factors to consider when investing the RESP and the most important is the child’s age. The younger the child the better, to maximize the compounding effect of tax-deferred growth inside the plan.  Starting the plan early also gives you a longer timeline so that you can build a more growth-orientated portfolio. Investing in the equity markets through mutual funds or any investments that can be held within a Registered Education Savings Plan may enable you to obtain a higher rate of return than from a guaranteed product. T here is no foreign content limit and how the funds are invested is your decision.
 
Withdrawals can start as soon as the student is enrolled in a qualifying post-secondary educational program. Qualifying programs include trade schools, apprenticeship programs (lasting a minimum six weeks), colleges and universities. The original contributions come out tax free, but any growth and grants is fully taxable. When the money eventually is withdrawn to pay for education expenses, known as an “Education Assistance Payment(EAP)”,  those funds are taxable income to the student (who likely has little other income, has additional  deductions for tuition, books etc. and therefore may pay little or no tax).
 
If the beneficiary or beneficiaries of the plan do not intend to immediately pursue a post-secondary education, the plan can remain open 36 years before it needs to be collapsed and all the growth within the plan will remain tax deferred, though no grants will be available on any contributions made after the beneficiaries have turned 18.  If the beneficiaries never pursue a post-secondary education the subscriber has several options, including:

• name another beneficiary if permitted by the plan;
• withdraw the principal from the plan as it is tax free. The growth is taxable income at the subscriber’s current marginal tax rate and the grants have to be repaid to the respective governments
• transfer the growth up to $50,000 to an individual or spousal RRSP if he or she has sufficient contribution room;
• donate the earnings from the plan to a qualifying education institution.

 
 
At PlanWright we can help you get an Registered Education Savings Plan started, and work with you to help make your child’s future education a reality.
 
 
Mutual funds are offered through Credential Asset Management Inc. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters. ^®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.
 
September 12, 2008