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What Is the Risk of Opening a RESP?

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This article is brought to you by insurance for children, Canada’s leader in financial planning for children and creator of Child Plan ™ the fastest growing alternative to the RESP. Child Plan, One Plan For Life.

Registered Education Savings Plans

A Registered Education Savings Plan (RESP) is a government savings account at a financial institution enabling parents who must both be  a Canadian resident, to save for their child’s post secondary education. But what the government gives, the government can just as easily take away!

What’s The Risk of Opening an RESP?

The single biggest risk to parents who use a Registered Education Savings Plan to save for their children’s future, is what happens if their child chooses to follow a different education pathway from the one the government has specifically stipulated for your child’s post secondary education?

What happens if Facebook’s Metaverse transforms the world of education, and your child wants to go to two universities in two continents, in one of the 50,000 online courses already offered by 900 colleges and universities worldwide, such as Harvard and Princeton?

How relevant is the RESP’s maximum educational assistance payment of $7,200 via the Canada Education Savings Grant (CESG) given to parents who deposit $36,000 into their child’s RESP account, if the cost of education is $100,000 in 18 years? It’s already $64,000 today.

The ‘carrot’ that attracts many to an RESP is The Canada Education Savings Grant (CESG) which can add up to $500/year for each beneficiary, up to age 18, with a lifetime limit of $7,200.

You can start a child’s registered education savings plan any time from birth to before they turn 18, and make withdrawals from age 18 onwards. Savings can only be added up to the year your child turns 18 and the plan must shut down 35 years after it’s started, or earlier if your child isn’t pursuing post secondary education.

When you shut down the plan, regardless of whether the child attended an approved post-secondary education or not, from the balance remaining:

·         the grant money you received must be returned to the Canada revenue agency

·         your deposits are returned to you; however, if there are any investment gains, you will need to pay tax on those.

The money can only be used by the child if they enroll in a full-time or part-time government qualifying post-secondary educational program and can be used for education-related expenses only. When the child receives money from their RESP, they also pay tax on any investment gains, depending on their student’s income.

While four out of five Canadians enroll in post-secondary education by their mid-twenties, Statistics Canada recorded that almost one (14.5%) in seven students drop out. This now creates another problem for parents and their children. They have invested in a plan that no longer has any value.

While you can get your contributions back, the grants go back to the Canada revenue agency. Any gains received could be taxed along with a 20% penalty.

For parents, this means you have spent 20 years saving for something that has had almost 0% return on investment.

Are there RESP alternatives with no rules and restrictions?

Child Plan ™ is the fastest growing alternative to the RESP and the only tax-free investment parents and grandparents can open for their children and grandchildren in Canada. From the day you open a Child Plan ™ , your child will receive a tax-free dividend for their whole life, which they can use for any education or university they will want to pursue without any restrictions or rules.

Because the money in a Child Plan TM can be used for anything, even a deposit on a first home mortgage, the plan will get used at some point. Using Microsoft founder Bill Gates as an example, he dropped out of university, so an RESP would have been irrelevant to him. But he may have found a Child Plan TM particularly useful to fund what was to become the world’s largest software company.

RESP is a government-initiated scheme where the only benefit is the matching grants of the CESG. However, like all government benefits, there is no guarantee that the CESG will still be available throughout the next 18 years.

Other risks of an RESP, Withdrawals

Many who have attempted making withdrawals from their RESP for educational expenses have found the process to be a nightmare of federal government-style “red-tape”, requiring documentation to justify even the tiniest of costs.

The financial institutions administering the RESPs invest the funds into mutual fund investments. The value of these funds can rise and fall in line with normal stock market fluctuations. Investment returns from these mutual funds are not guaranteed. You have no control at all over what RESP asset allocation the financial institution chooses. If students need to withdraw at a time when market values have fallen, they might receive much less than expected.

The future of learning is changing. Already, according to website classcentral.com, there are now over 50,000 online courses today from over 900 of the world’s top universities like global institutions such as MIT, Harvard, Berkeley, and leading companies like AWS, Microsoft, and IBM. In a future where an entire three-year degree gets delivered from the other side of the world to a student in their own home via a virtual reality headset, how will RESP work in that environment?

It won’t!

Government Regulation Risk

The RESP is a federal government program with rules created by officials in Ottawa. As such they can create new rules whenever they want and you won’t know about it until it’s too late.

A good example is the introduction of a 20% penalty on investment growth in an RESP account when the funds are not used. Since the world of learning is changing with technology, we don’t know what rules and conditions could be added or taken away in the future.

You have no control, and there is no flexibility built into an RESP, but the government has an unlimited time horizon to make changes that fit their agenda, not yours.

Contribution Limits to RESP investments

While you can contribute as little or as much as you want each year to an RESP, there is a $50,000 lifetime limit (by the time the child is 18), whereas Child Plan TM has no maximum limit, the plan is completely funded at year 20, but your child can continue to add to their plan with no restrictions.

However, the maximum CESG grant is $7,200 over 18 years if you deposit $36,000. There is no benefit for you to pay more than $36,000.

If you miss a year of contributing to your RESP then you have only one year to catch up and get the CESG. You can deposit up to double the year you missed, and receive up to $500 for this year and up to $500 for the missed year. To receive the maximum grant of $7,200, you will need RESP savings of $36,000 before the child reaches the age of 18.

It is highly likely that even with the maximum RESP contributions, plus the maximum CESG grant, plus fluctuating investment earnings, that this tax free savings account will still not have sufficient investment growth to fully fund a student education in the future 18 years from now.

Are there RESP alternatives with no restrictions on contributions?

Participating Whole Life Insurance – Child Plan ™

Any family member beyond parents and grandparents can open a Child Plan TM for a child and start contributing from as early as 14 days after birth. While there are no limits on how much annual contributions you want to invest for your child’s future, Child Plan TM, is means tested.

The child can withdraw some or all the entire cash value at any time after age 18, with minimal paperwork, for any purpose, non-taxable! Child Plan TM is a very flexible investment, it can be adapted to meet the child’s changing savings goals.

If the child should die, the Life Insurance sum gets paid to the child’s estate, and the amount payable will be significantly higher than the cash value of the plan.

“To get an indication of how Child Plan TM could work for your child, request an illustration here.”

FAQ 

What Happens To RESP If Not Used?

After the plan has been in place for 35 years, the RESP will be shut down. The government grant money is returned to the Canada revenue agency, and you receive the rest, with any investment gains being taxable income.

How Much Can You Contribute To RESP?

Your payments can be as little or as much as you want, up to a lifetime limit of $50,000. Contributions below $36,000 will not maximize the amount of grant money potentially available. There is little incentive to contribute more than $36,000.

Who Can Open An RESP?

Anyone over the age of 18. You must name one or more children under 18 to be the recipient.

What Other Options Are There For Saving For My Child’s Future?

Child Plan TM participating whole life plan is the only tax free investment that enables your child to access the cash value for any education 18 years from now with no restrictions, rules or fees.

Can My Child Use Their Child Plan For Anything Beyond Education?

Yes, with a Child Plan your child has no restrictions on what they use their plans’ cash values for. From their first home to opening a company if that will be their dream.

Can My Child Use Their Child Plan Participating Cash Values From Anywhere In The World?

Yes, your child can access their cash values from anywhere in the world without restrictions or fees and for anything they’ll need, not just for education purposes.

Sample illustration of Child Plan™ Cash and Insurance Values

Based on a Monthly Deposit of $225 per month

Age Accumulated Cash Value Life Insurance Value
20 $80,448 (Education) $770,802
35 $184,850 (House) $1,070,880
45 $325,714 (Security) $1,343,568
65 $964,321 (Retirement) $2,082,564

Sample illustration is based on a $225 monthly premium for twenty years, starting when the child is less than 1. Cash and life insurance values are based on the current dividend scale of 6.0% from a Canadian Life Insurance Company. This example is strictly for illustrative purposes only, the annual dividend scale is not guaranteed and values may differ.

Personalize Your Child Plan™

Request a Child Plan™ Illustration and see how much cash value your child will have for their education and for life.

Request Illustration

*illustrations are reflective of the annual premium amount

Have a question about Child Plan or wish to speak with a Family Advisor?