Are you planning to put away funds for your child’s post-secondary education? Here are some tips for making the most out of a Registered Education Savings Plan.
1. Maximize Grants without Over-Contributing
One of the things you need to know about Registered Education Savings Plans is that you should try to avoid over-contributing. This may seem counterintuitive, but it can help you save. For every child, the contribution limit is $50,000. Saving above the monthly threshold attracts a penalty of 1% of the excess on a monthly basis. It is therefore advisable to always monitor your contribution or hire a professional to help you.
2. Find the Right Mix as You Edge Closer to Needing the Funds
It is essential to find the right balance for your Heritage RESP investments to earn an attractive return. However, you want to avoid any form of penalty or charges that will impact your savings before withdrawing the funds. After all, you don’t want to jeopardize your child’s education due to a lack of finance. Also, you don’t want to invest heavily in low-yielding GICs or bonds when your child still has many years ahead before gaining admission into college.
Instead, it is recommended that you focus your investment strategy on equities rather than fixed income in the early years of a Registered Education Savings Plan, and over time, increase the fixed income and cash proportion as your child edges closer to securing a post-secondary education.
3. Try to Minimize Taxes When Withdrawing the Funds
As your child gets closer to needing the funds, it is wise to find ways to withdraw the funds tax-effectively. With your child in college, he or she is entitled to withdraw funds from the government grants and income part of your investments, which are known as Educational Assistance Payments (EAPs). These funds are not tax-free. On the other hand, withdrawals of your contributions are tax-free.
If done the right way, then the contributions will not be taxed. And if it eventually gets taxed, the amount will be minimal. To this end, you should start getting out your EAPs early to ensure they get used. Be sure to keep your advisor or financial institution updated with the amount you withdraw from both EAPs and contributions.
4. Use up all the Funds as Your Child Gets Closer to Graduating from College
The primary purpose of an RESP is to provide your child with funds while he or she is in school. This is a big relief for most parents as they have funds available to help finance their post-secondary education. If your child decides not to pursue post-secondary education or they’ve graduated from the university, and yet the RESP continues, then you should know that some rules apply to withdrawing the funds. Experts recommend depleting the funds while your kids are still in school. This is because those funds have stricter withdrawal policies if you fail to use them before your child is finished with school.
All in all, a Registered Education Savings Plan can save you from the hefty tuition bill associated with college and specialists from Heritage Education Funds can help you and your family.. So use these tips to get the most out of your child’s RESP.