September signals back to school, and while everyone’s thoughts are on school supplies, new gear, and learning, one thing is often overlooked: investing in higher education.
If you forgo planning for the future, you are also missing out on thousands of free cash from the government to help you grow your investment. By now, most people have heard of the Registered Education Savings Plan (RESP) – a government registered savings plan that helps Canadians save for post-secondary education. Let’s face it, tuition is only going up. According to Statistics Canada, the average cost of one year of undergraduate tuition nearly tripled between 1995 and 2015. Factor in the cost of residence, textbooks, food, transportation, and other incidentals, and you are probably averaging upwards of $20,000 per year.
The RESP can relieve some of that financial stress if you start planning early. You will benefit from investment returns and growth along with government grants, which compound over time. There are 2 types of RESPs to focus on:
- Individual Plan – only one child is named in the RESP
- Family Plan – this can be shared among siblings
As mentioned earlier, the key is to start early. You can open an RESP and start contributing as soon as your child is born – all you need is a Social Insurance Number (SIN) for him or her. You can put in any amount up to a lifetime maximum of $50 000 per child, and anyone can contribute: aunts, uncles, grandparents or friends of the family.
Once your child enrolls in a qualifying post-secondary education institution, their costs are covered. The payments are called Educational Assistance Payment (EAPs), which must be claimed as income on their tax return. Because they are students, they most likely won’t have any tax implications since they will be in a low tax bracket.
But where is the free money? Well, you can get it several ways:
- Canada Education Savings Grant (CESG) – for every dollar you put in, the government kicks in 20 cents up to a maximum benefit of $500 on an annual contribution of $2,500, in other words 20% of $2,500. This can add up to a maximum of $7,500 over the lifetime of the plan.
- Low-income families may qualify for an additional grant if their household’s net income is less than $95,259 (2019) through a $500 Canada Learning Bond (CLB) that is paid into the RESP to help get your child started, and then an additional $100 is added each year (as long you are eligible) until they are 15. The lifetime maximum is $2,000!
- Some provinces offer grants to encourage saving for education. For example, there is the British Columbia Training and Education Savings Grant.
Of course, even the best laid plans don’t always turn out how you expect them to. So, if your child decides post-secondary is not for them, what do you do with the RESP? Don’t worry, there are options:
- Transfer up to $50,000 to your Registered Retirement Savings Plan (RRSP)
- Withdraw your contributions (the government grant portion is returned) after paying a tax on the investment returns
- Give it sometime in case your child changes his or her mind. The RESP can stay open for 35 years before it expires.
If you are looking for more information on the RESP, you can find the details here. And you can always have your financial advisor administer your investment in your child’s future and guide your family along the way.
Ian Webster's nearly two decades of recognized experience at several well-known financial organizations has given him the inside track on the upsell of products such as mortgages and mutual funds and allowed him to help clients with everything from lowering their taxes to developing profitable investment portfolios. His expertise has been featured in The Globe and Mail, Toronto Star, Toronto Sun, and Time. He has also been a featured financial speaker at many high-profile networking functions. Find Ian online at www.financialfighter.com and on Twitter, Facebook, Linkedin, and Instagram.