When it comes to savings, it is never too early to start. This is especially true for children’s education. Kindergarten quickly turns into high school, and in the blink of an eye, university brochures and campus tours become part of the weekend schedule. Having a savings plan will help guide you through the years leading up to post-secondary education, so when acceptance letters come, the costs of tuition won't feel so overwhelming. Saving plans set children up for a bright future and reinforce the value of planning and saving.
A good financial plan will take education planning as seriously as retirement planning.
Saving for the future
A Registered Education Savings Plan (RESP) is a special savings account to help parents save for their children’s education There are other non-registered educational saving strategies, including family trusts and in-trust accounts, but RESPs offer additional benefits from the government. An advisor can help choose the best savings plan for your family.
RESPs can be opened for your own child, nephew, niece, grandchild, or any young person who will use post-secondary education to pursue their dreams and future career. By saving early, an RESP can grow as quickly as the kids.
How does an RESP work?
There are three main players in an RESP: a subscriber, a beneficiary, and a promoter.
- The subscriber is the person who opens and makes contributions to the RESP. It can be a sole subscriber or include a joint subscriber
- The beneficiary is the potential student. The savings in the RESP will be used to help fund their education.
- The promoter is the company that administers the savings plan.
Maximizing RESP contributions
University and college is expensive, so make the most of an RESP by reaching the lifetime limit per beneficiary of $50,000. Any growth, such as interest payments, capital gains and dividends earned, are tax-sheltered throughout the life of the RESP. When it is time to pay for university or college, the funds are withdrawn and taxed in the hands of the student, but (don’t worry) students are usually in a much lower tax bracket.
When parents invest in their kid’s education, the government does as well through grants and bonds.
Canadian Education Savings Grant
The Basic and Additional Canada Education Savings Grants (CESG) are for all children that are Canadian residents. These grants are paid on the amount contributed to a RESP and paid directly into the plan. The basic CESG is equal to 20% of each contribution dollar to all eligible RESPs up to $500 per child, per year, regardless of family income, up to, and including the year the beneficiary turns 17. If there is unused grant room from a previous year, the maximum is raised to $1,000. The lifetime limit for the basic CESG is $7,200 and is not included in the lifetime limit of the plan.
Also, the Canada Education Savings Grant is available to assist lower-income families. The same income information that is used to determine eligibility for the Canada Child Tax Benefit is used to qualify families for the grant.
Canada Learning Bond
Depending on household income, eligible families can receive the Canada Learning Bond (CLB). This means they will receive $500 upon opening an RESP and could receive $100 per year, up to a maximum of $2,000 per child. Even if savings are small year-over-year, they will add up over time.
Provincial education savings incentives
Some provinces offer additional grant money to top off the federal programs. In British Columbia there is the BC Training and Education grant where the province will contribute $1,200 to eligible children between the ages of 6 and 9.
RESPs and available grants are the best way to safeguard children’s educational futures, so plan to take advantage and watch your RESP grow.
All in the family
Pick a plan that works for you. RESPs can be set up for single or family beneficiaries. Family plans can include beneficiaries that are related by blood or adoption. This allows flexibility as funds can be reallocated if one child decides against going to college or university.
Adding children or re-assigning beneficiaries is allowed after an RESP is opened. Providers will offer information on how contributions or grants could be affected with plan changes.
If the RESP is not utilized by any of the beneficiaries, the contributions are returned to the subscriber tax-free. Income that was earned on the contributions, known as the Accumulated Income Payment (AIP), will be taxed at the subscriber’s income tax rate with an additional 20% tax. The tax on the AIP can be reduced if the subscriber transfers the funds to an RRSP. It is important to remember that any of the government grant or bond contributions (such as the CESG) is returned to the government.
Make education savings part of your financial plan
Education savings might not be at the forefront of parents’ minds during the sleepless newborn nights, but the sooner the powerful tool of the RESP is put to work, the more prepared students will be when they head off to college or university. Education savings should be part of a family’s overall financial plan. When you think of the future, think of saving today.
Get planning help
Let us work with you to understand your overall educational goals and planning. The future is open to every possibility, and our goal is to work together to evaluate the various options available to save for your children’s future.
Whatever path they choose to take, saving today will make tomorrow brighter and more secure. Talk to a trusted advisor today.