According to statistics, more than 65 % of Canadian parents have educational aspirations for their children after high school. Aided by the Registered Education Savings Plan (heritage RESP), most of these aspirations are achievable. However, there are persistent myths about RESP that have scared many parents from investing in their children’s education. Below are six of these myths.
1. RESP’s Contributions Are Not Tax-Free
Unlike the Registered Retirement Savings Plan (RRSP), contributions made to an RESP are tax-free. Consequently, withdrawing your RESP investment is tax-free. The amount withdrawn during the first year of your child university education does not attract any tax. This is because your child’s earning during this time is below the tax regime. The tax exemption benefit to the child is the main reason parents join RESP.
2. Proof of Enrollment Is Required to Withdraw Funds
To withdraw your funds, you don’t need to provide evidence of your child’s enrollment in a university, college, trade school or CEGEP in Quebec. Letters of acceptance are taken as proof the enrollment is valid. Registrars’ offices in any school in Canada provide enrolment letters to facilitate withdrawal of RESP funds. The proof of enrollment letters is also availed in the student’s online portal to download whenever necessary.
3. There Are Withdrawal Limits for Students Enrolled in the First Semester
There is no limit of heritage RESP funds withdrawal in the first semester of enrollment. Full-time students can withdraw 5,000 dollars’ worth of grants and growth in the first 13 weeks of their stay in college. On the other hand, part-time students can also withdraw 2,500 dollars of growth and grant. You can withdraw the entire amount at the end of the first semester. There are no limits on withdrawing your contribution to an RESP.
4. You Must Provide Expenditure Receipts to Withdraw RESP Funds
You are not required to show what you need to spend your money on. All you need is to prove your child is in a qualified institution.
5. Your Investment Is Lost If the Child Fails to Join a Qualifying School
If your child doesn’t join a qualifying school, the grants are repaid to provincial and federal governments. However, your original contribution comes back with no tax charged on you. Any growth in an heritage RESP is taxed using the subscriber’s marginal tax rate with an additional 20% withholding tax. Your child can still benefit from RESP since it is valid until he or she is 35 years.
6. You cannot invest in an RESP Unless You Are a Child’s Parent
This is false. Anyone can invest in an RESP. Whether you are a parent, uncle, grandparent, a close friend, etc., you can invest in a child’s post-secondary education. You don’t need to be related to a child to open an RESP account for them.
The aim of joining RESP is to invest in the education of your child. With the above clarity on the misconceptions about RESP, you can proceed to open an RESP account for a child with confidence.