What are the disadvantages of RESP?

Once again, it is crucial that you know the major PROs and CONs of a Registered Education Savings Plan (RESP). One of the major PROs: this savings plan makes you eligible for government grants, such as the Canada Education Savings Grant (CESG). The Canadian Education Savings Grant can match 20% of the first $2,500 you contribute annually. On the flip side, if the funds are not used for education, the money gained would be heavily taxed on withdrawal, and you will also have to return the grants received. Consider a family that has been contributing graciously for years to have their child penalized because they chose not to attend post-secondary education. This, then, is a huge CON, as you can imagine.

The RESP has a lifetime contribution limit of $50,000 for each child. At the same time, there is no annual contribution limit set; therefore, you can contribute at your own pace. However, it is essential to remember that government matching is capped, so plan your contributions accordingly. For example, if you contribute $10,000 in one year, the CESG only matches the first $2,500. A family learned this lesson the hard way when they lost out on a couple of thousand dollars in grants, as they did not know about this cap. Always plan your contributions with the grant limits in mind to maximize benefits.

For sure, there are complaints from some subscribers that the investment options for RESPs are quite restricted. For example, Sarini is a single mom who selected a Registered Education Savings Plan for its tax benefits but felt quite frustrated by the limited conservative investment choices available within it. This lack of flexibility caused a lot of stress as she felt that she could only adjust the investments according to her risk tolerance. Research an RESP provider’s investment options in advance of selecting. An important decision is available for investigation to find an RESP provider’s investment options suitable for your financial plan.

Over-contributing to an RESP is a very simple mistake, but it could prove to be very costly. The Chen family made a mistake by over-contributing to a plan and contributed more than the $50,000 lifetime limit. This caused a 1% per month penalty on the excess contributions until they were removed. This is a strong caution for keeping good records of contributions, especially if there are multiple family members who are contributing to the plan. It is wise to monitor your total contributions regularly in order to avoid these stiff penalties.

An equal division of an RESP among several beneficiaries needs to be well planned and communicated. The Thompson family was not able to divide the funds among their children as they each had different educational expenses. Clear expectations on how the funds will be distributed among the beneficiaries should be set up at the beginning, perhaps based on the needs and educational path of each beneficiary, to avoid such c

Non-educational withdrawal of contributions to an RESP is highly penalized. If the beneficiary of an RESP does not further his education, you may withdraw your contributions without any penalty, but the earnings made on those contributions are taxed at your marginal tax rate plus an additional 20%. You will also be required to give back all of the government grants. That’s what happened to Liam’s parents. They had saved with the expectation that their son would go to college. Instead, they were penalized because he wanted to do something else.

According to the CRA, the beneficiary must be a resident of Canada and have a valid SIN number to qualify to receive contributions. Also, for funds to be withdrawn tax-free for educational purposes, the beneficiary must have been enrolled in a qualifying educational program. This rule ensures that the RESP performs the intended purpose of supporting a child’s post-secondary education.

You can transfer an RESP to another family member, subject to conditions. To illustrate, the eldest son of the Nguyens decides to start a business instead of going to university. His parents transferred his RESP to his younger sister without any tax penalties because she is under 21, and the plan is a family plan. Had the plan been for an individual, they would have to meet other conditions outlined by the Canada Revenue Agency, including the requirement that the beneficiaries are siblings. This flexibility is a major pro of the RESP but needs to be weighed against the very specific rules and conditions of transferring an RESP.

There are significant tax implications if you have to collapse an RESP and the funds are not used for education. The contributions are received by you tax-free, however the earnings are treated as income for the year and are taxed at your marginal rate plus a 20% tax penalty. You will also have to return any government grants you have received. This is the situation that the Robinson family found themselves in after their only child decided that he would rather pursue the arts as a career and didn’t need to attend college to pursue his dream. If your child seems to have no clear goals for their future education, be sure to consider this as a possible drawback.

The different RESP providers can make a big impact on how you manage an RESP. They have different investment options, fees, and quality of customer service. For instance, Maria and Jake selected the provider that had very low fees but quickly found that the lack of customer service was a problem after they struggled to talk with someone about how to reallocate investments. It’s important to shop around between different providers. Don’t just look at the fees. Look at the kinds of services and service providers. It can make a big difference when weighing the pros and cons of the RESP experience.

What happens if the person for whom your RESP was intended gets a scholarship? You may be asking yourself this question. If your RESP beneficiary gets a scholarship, you can still use the money in the RESP for other education, such as housing, books, and living costs. For example, after the Lee family’s child received a full tuition scholarship, the RESP money was used for boarding and all the other things related to college for the child, and they were able to access the saved money without any penalty.

One of the most prevalent reasons is to keep up with the changes in RESP rules. As the government policies for RESPs might change, it is more likely that rules for contributions, withdrawals, or even eligibility be changed. In short, the eligibility of types of programs that can be enrolled under an RESP, such as the recent updates, when you need it. A great idea is to check often back with a reliable source and, therefore, with your RESP provider or a financial advisor. This will ensure you are not met with any surprises and you are able to o

Yes, you can change your investments inside the RESP, depending on the flexibility of the plan and terms set by your RESP provider. Take, for example, the Carter family. They chose an investment option with high risk at the time of enrollment. As their child was getting close to college age, they wanted to change to more conservative investments in order to protect their accumulated money. Since their RESP provider had options for flexible investments, they did this easily. This flexibility of investment is one of the RESP structure’s key advantages, with the savings plan capable of being adapted to potential changes in financial circumstances and goals.

Starting later in your child’s life will lower the potential amount of government grants you will receive because the grants are capped for every year of the child’s life. For example, the Ahmed family opened an RESP when their daughter was 10. They, therefore, could not claim a maximum amount of the $7,200 possible grant money since the government grants stop when the child reaches 17. This situation provides one of the cons of RESPs: one has to start early to take full advantage of the compound interest and government contributions, a key consideration for the pros and cons of the RESP.

RESPs would not directly have any impact on eligibility for most government benefits because the money contributed and grown in a RESP is money earmarked for educational purposes and does not count as taxable income. Suppose money is taken out as Educational Assistance Payments to a beneficiary, on the other hand. Unfortunately, it might affect that beneficiary’s ability to get student aid or other benefits that depend on their income. For example, the Wong family learned that the Education Assistance Payments (EAPs )for their son did lower his access to a couple of student loans and grants that are based on personal income levels. Being able to help families plan for how they are going to finance their children’s education is important.

When an RESP passes its 35-year maturity date (or the year a child was born), it must be closed, and any remaining contributions are returned to the contributors tax-free. However, the earnings on those contributions are subject to taxation. The account must also be closed, and any government grants received must be returned. This is the situation the Gill family found themselves in when their RESP matured, but their child took a gap year. They had to make rushed decisions to avoid monetary loss, which, again, could happen if a child’s education timing is not in perfect tandem with the maturity of the RESP.

The choice between a family and an individual RESP depends on your family and your financial goals. If you have several children and want the flexibility to use the funds across them, choose a family RESP. On the other hand, if you have only one child, you may consider an individual RESP easier to manage. The Martins, who have three children in different education levels, chose a family RESP because they could distribute the funds to other siblings as their education needs changed. Each type of RESP has its pros and cons, so the decision really rests upon what would be the most beneficial for you and your family specifically.

These frequently asked questions (FAQs) and examples will help you better understand the many complicated parts of the Canadian Registered Education Savings Plan (RESP). This will allow you to use the RESP as a useful tool for planning your family’s schooling and finances.