CH4 KEY BENEFITS AND POTENTIAL RISKS OF RESPs (Benefits of RESPs (1) Tax…
CH4 KEY BENEFITS AND POTENTIAL RISKS OF RESPs
Benefits of RESPs
1) Tax Savings
e a tax-deferred not tax-deductible
, but .those contributions will be taxed in the hands of the
. who are pursuing post-secondary education will have limited income and so will be
subject to little or no tax.
2) Tax-Deferred Compound Interest
for up to 35 years.
Compounding interest: Interest
that is paid on the original amount deposited, and also on any interest that has been earned in previous periods. In Year 1, the bank pays you $5 interest on your $100 deposit. In Year 2, it pays you interest on $105.
3) Savings Enhanced by Government Grants
The Federal Government will add to savings with the Canada Education Savings Grant (CESG) equal to 20% of every eligible dollar contributed to an RESP up to $2,500 contributed per year (CESG of $500) and a lifetime limit of $7,200 per beneficiary. Additional CESG, the Canada Learning Bond and provincial education savings programs could provide additional grant money to eligible subscribers and beneficiaries.
This benefit is usually not available to subscribers in many Group Plans, but those with a self-determined option will have some of the features of a Self-Directed Plan such as the ability to transfer income to an RRSP or withdraw it. Subscribers in Group Plans can also transfer their Plan to an Individual or Family Plan. These options are discussed in more detail in Chapter 5.
5) Education Incentive
When subscribers start saving towards post-secondary expenses, the beneficiaries are more likely go to university
Potential Risks of RESPs
Subscribers in Self-Directed RESPs such as those offered by banks can choose from
a wide range of investments from the most conservative to the most volatile
However, even conservative investment portfolios can fluctuate in value and may not provide the rate of return that was expected by the subscriber.Even the most stable financial institution could conceivably be affected by events that impact global financial markets
risk tolerance of the subscriber
There are fees associated with almost all RESPs. They include fees for such things as
enrolment (membership), optional insurance coverage, depository services, administration costs and withdrawals.
These charges will reduce the investment returns
if the required Social Insurance Number is not provided within 24 months, the Plan will be terminated.
With no annual minimum,
subscribers may deposit up to a life time maximum of $50,000 which could be contributed in one year to an RESP. However, large one-time contributions may not attract the full amount of government grants
not pursue post-secondary education. Grant monies will have to be repaid, and subscribers may not be entitled to receive the income that has been earned on their contributions.
the termination and withdrawal of principal from a Plan in which contributions were made after 2004 could result in a forfeiture of the Additional CESG
the tax rate applicable to full time students will be very low or even zero, but students with substantial amounts of income may find that they have to pay significant taxes on the income they receive from EAPs.
Both you and the subscriber should carefully consider the affordability of a proposed investment in a Group RESP Plan.There can be significant costs for subscribers if they cancel their Group RESP