Registered Education Savings Plans (RESPs) are a popular savings vehicle for families in Canada looking to save for their children’s post-secondary education. These plans offer several benefits such as government grants, tax-free growth, and the ability to save for a child’s future education expenses. However, it is important to be aware of the drawbacks and limitations of RESPs before opening an account.
One of the main drawbacks of RESPs is that they are only intended for post-secondary education expenses. This means that if your child decides not to attend college or university, the money saved in the RESP cannot be withdrawn without penalty. In addition, the money in the RESP must be used within 35 years of the plan being opened, or it will be subject to penalties. This can be a problem for families who may not be sure about their child’s future plans and can create a problem if the child decides to pursue a different path after high school.
Another limitation of RESPs is that the contribution limits are relatively low, currently set at $50,000 per beneficiary. This means that if you have more than one child, you may not be able to save enough for each child’s education expenses. Additionally, if you are unable to contribute the maximum amount each year, the government grants will be proportionately reduced. This can be a problem for families who may not have the financial means to contribute the maximum amount each year.
RESPs also have strict rules regarding withdrawals. Money can only be withdrawn to pay for post-secondary education expenses, and the withdrawals must be made in the name of the beneficiary. This means that if the beneficiary is unable to attend college or university, the money cannot be withdrawn for other expenses such as living expenses. This can be a problem for families who may not have other savings to cover these expenses.
Another limitation of RESPs is that the investment options are typically limited. Most RESPs are invested in Guaranteed Investment Certificates (GICs) or other low-risk investments, which may not provide the same level of growth as other investment options. This can make it difficult to save enough money for post-secondary education expenses. In addition, the low-risk investment options may not provide the same level of returns as other investments, which can make it harder to reach the savings goals.
In addition to these drawbacks, it’s also important to note that the government grants and tax benefits associated with RESPs are subject to change. The Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are two examples of government grants that are available to families contributing to an RESP. However, the government can change the amount of the grant or discontinue it at any time, which can affect the overall savings in the plan.
Another thing to consider is that the tax benefits associated with RESPs are also subject to change. The income earned in an RESP is not subject to tax as long as it remains in the plan, but when the money is withdrawn to pay for education expenses, it’s taxed in the hands of the student, who may be in a lower tax bracket. If the government changes the tax laws, it can affect the overall benefits of the plan.
Despite these drawbacks, RESPs are still a valuable savings tool for families looking to save for their children’s post-secondary education. However, it’s important to be aware of these limitations and to have a backup plan in case your child decides not to attend college or university. It’s also recommended to consult with a financial advisor to make sure you are making the best decision for your family and to have a good understanding of the plan’s features before making a decision.
Additionally, it’s important to consider other options such as Tax-Free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs) that may also provide tax benefits and government grants. TFSAs, for example, allow for tax-free withdrawals and have higher contribution limits compared to RESPs, making them a viable option for saving for education expenses. RRSPs, on the other hand, can be used for education expenses through the Lifelong Learning Plan (LLP) which allows for tax-free withdrawals for education purposes, but it does have limitations such as the funds must be repaid within a certain timeframe.
It’s also important to consider the age of the child when deciding to open an RESP. If the child is close to starting post-secondary education, it may not be worth opening an RESP as the contributions may not have enough time to grow. In this case, other options such as student loans, scholarships, or part-time work may be more appropriate.
In summary, while RESPs offer several benefits such as government grants and tax-free growth, they also come with some drawbacks and limitations that potential contributors should be aware of before opening an account. The strict rules regarding withdrawals, low contribution limits, and limited investment options can make it difficult to save enough money for post-secondary education expenses. It’s important to consider these factors before opening an RESP and to have a backup plan in case your child decides not to attend college or university. It’s also recommended to consult with a financial advisor to make sure you are making the best decision for your family and to have a good understanding of the plan’s features before making a decision.
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