One of the greatest gifts you can give your child is education. But when forecasting the future cost of your child’s post-secondary education, the total amount may surprise you.
The rising costs of tuition, books and computers as well as those associated with studying away from home, such as rent and a meal plan, quickly add up. However, with careful planning and using the proper investment vehicle, it is possible to pay for your child’s education.
It is important to not only put aside money for these costs but to take advantage of any government programs that help offset the burden. Investing in securities that have the potential to grow faster than the rate of inflation is also key.
What are RESPs?
A Registered Education Savings Plan (RESP) is a tax-sheltered plan registered with the Canada Revenue Agency (CRA) that can help families save for their children’s post-secondary education. Contributions made to an RESP grow tax-free until the funds are withdrawn to pay for the child’s (i.e. the beneficiary’s) education at a designated post-secondary institution.
A unique advantage of an RESP is that the Government of Canada will match 20% of the amount contributed to all RESPs for an eligible beneficiary, up to a maximum of $500 per year, and up to a maximum of $7,200 during the beneficiary’s lifetime. Depending on where you live and what your family’s net annual income may be, there may also be additional incentive opportunities available. For children aged 16 or 17 years old, certain criteria will need to have already been met in order for them to qualify for the government grant.
An RESP not only allows your investments to grow tax-free but is also an income-splitting opportunity. When the time comes to withdraw money from the plan for post-secondary education, it will be taxed in the hands of the beneficiary, who will most likely be in a much lower tax bracket than the subscriber. This could result in little or no tax on the withdrawal. In addition, only the investment gains, government grants and investment gains on the government grants will be taxed. Any withdrawals of contributions (original principal) are tax-free as they were initially invested with after-tax dollars.
In the event that the child elects not to get a post-secondary education and you are not able to name a new beneficiary, you, as the subscriber, can withdraw your contributions tax-free. Also, while all grant money is returned to the government, any investment earnings gained are eligible (up to a maximum of $50,000) to be transferred into your Registered Retirement Savings Plan (RRSP) or spousal RRSP, if you have accumulated enough contribution room and if certain conditions1 are met.
Options for larger families
If you have more than one child2 each under 21 years of age and do not have a large age gap in between, a Family RESP is ideal because grants can be shared among the beneficiaries. While not always the best choice when you have more than one beneficiary, they are easier to administer than multiple individual RESP plans.
Individual and Family RESP plans differ in a number of ways including:
- subscriber and beneficiary relationship
- age limitations for contributions
- beneficiary age restrictions for being added to the plan
- plan termination date
Additional information about these differences can be found at www.canlearn.ca.
It is important to speak to your financial advisor about what plan would be right for you and your family.
Keep the end goal in mind
When it comes time to decide what kind of investments to choose for your RESP, your child’s age should play a key role in your decision. For younger children with a long-term investment horizon, you could consider a more aggressive portfolio where any short-term volatility may be overcome with better long-term performance. If your child is older, then perhaps a more conservative investment makes sense as they will need to start to redeem from the account over the next few years. As with any investment plan, your financial advisor will help you set up your RESP plan or choose the right investments with your investment horizon and risk tolerances in mind.
For more information how you can start saving for your child’s education, talk to your financial advisor or visit AGF.com/RESP.
1 For more information on Accumulated Income Payment (AIP) conditions, please visit http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/pymnts/aip-pra/cndtns-eng.html
2 Related to each other and you by blood or adoption.
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