For many, the day of December 31 evokes New Years Eve and the traditional Bye, but also reminds us of the imminent arrival of the deadline for contributing to education savings plans (RESPs). Although the RESP is a well-known investment vehicle for Canadian households, only almost half of Canadians would use it to date.
In theory, most parents are aware of the purpose of the plan – to fund children’s post-secondary education – but the tax benefits of the plan, its optimization and the operation of contribution limits are often poorly understood in practice.
Do you have children or grandchildren whose savings are in a bank account or TFSA? Do yourself the favor of running by Christmas to meet your advisor rather than running the malls.
Regardless of your situation and your family income, the amounts invested in an RESP benefit from a return of at least 30% considering the generous grants offered by both the federal and provincial governments.
In addition, the portfolio taxation is a strategic element to consider, and the RESP allows tax deferral and income splitting with your children. Now, here are some things to consider in order to achieve your goals without breaking your head too much.
We must talk to each other before December 31
A child can be the beneficiary of more than one RESP account. As a grandparent, godfather or godmother, you may want to help fund the education of your loved ones, and that is to your credit. However, if communication is an important ally in any family situation during the holiday season, it is particularly so here. In fact, the subsidies are calculated on an annual contribution limit of $ 2,500. So, if Grandpa and Grandma decide to open an RESP for their grandchildren and the parents have already contributed to the maximum in 2021, you just missed the overcontribution grants unless unused contributions can be made. be caught up.
You have to be patient
I have already seen clients who are very happy to tell me that their parents have opened an RESP and contributed $ 20,000 per child as a gift. Perfect gift idea, it goes without saying. However, unless you are certain of obtaining a net return of 4.25% in the plan, it pays to spread the contributions over several years to optimize the grants rather than investing the full amount at the start. of the plan. In all likelihood, you will benefit from spreading your gift over several years since the grants are guaranteed, while the return is not.
Of course, each situation is unique, and if you have a large non-registered portfolio, also know that you can invest more than the $ 2,500 per year in the RESP to at least take advantage of the advantageous tax treatment that the RESP offers on your income from placement.
You have to think of the worst
What happens in the event of the death of the subscriber? While it is rare for this to happen when the parent is the subscriber, it becomes statistically more likely when the grandparents are. As the contributions belong to the subscriber, there is therefore a risk that the RESP objective will not be reached and that the contributions will be “diluted” throughout the estate.
Thus, if there is no joint subscriber to the plan, a successor subscriber should be appointed. You’re guessing that someone you trust must be selected to make sure your estate plans are followed. Be careful, however: if you name a minor child directly as a substitute subscriber, you will have to provide for the administration clauses in your will that will prevent the triggering of a tutorship council for the minor’s property. The protection mandate in the event of incapacity is also required.
It is possible to keep a secret
One of the fears parents have with respect to the RESP is that they have contributed too much to the RESP. “I don’t want him to think he doesn’t have to put in the effort to work a little while in school. However, I reassure you. Your children don’t have to know that you have $ 50,000 in an RESP in their name. At the ideal time, you will be able to withdraw the sums required to support them through Educational Assistance Payments (EAPs), on which they will be taxed, and resume your contributions. Parents are also sometimes afraid that their child will not go to university studies, and thus “to have contributed for nothing”.
Note that private RESPs can pay EAPs for all post-secondary education programs, including vocational education programs. The diet can also be open for 35 years, giving your offspring time to change branches and return to school. Finally, in the worst case, you will resume your contributions or transfer them to an RRSP.