The prospect of ‘free money’ is hard to pass up, so it might come as a surprise that the majority of parents turn down money from the Government each year. In fact, as many as two-thirds of students say they do not have a Registered Education Savings Plan (RESP) in place to help them with the cost of education.
The truth is, an RESP is an excellent opportunity for those with young children to get a head start on saving, with a little help from the Government. We break down the basics to help you get started.
What is an RESP?
The RESP is an investment vehicle that is registered with the Government of Canada to save for a post-secondary education. The Government offers an incentive to save in the form of the Canada Education Savings Grant (CESG), which adds at least 20 percent on top of the RESP contribution up to a maximum of $500 (for a $2,500 RESP contribution). This percentage amount increases for families with income lower than $90,563. The lifetime grant limit is $7,200.
What are the benefits?
The main benefit to the RESP is the annual government grant. In addition, funds within the RESP may be invested, thereby earning potential returns which can grow the funds over time.
Another benefit to the RESP is the tax-deferred growth on earnings within the plan. Ultimately, taxes are charged in the hands of the beneficiary (the student), who may pay either no taxes or very little taxes on earnings.
What are the drawbacks?
If you haven’t yet contributed to an RESP and your child is no longer a toddler, it will be a challenge to catch up. RESP rules dictate that you may only carry forward one year of contribution room. So, if your child is turning 8, you cannot simply multiply $2,500 (the typical threshold for maximum grant benefit) by 8, contribute that amount, and anticipate a supersized grant amount. Instead, you may contribute $5,000 and anticipate $1,000 in grants. The following year you may do the same, until you’ve ultimately caught up to all the years you’ve missed. As such, it’s best to start while your child is young.
It should be noted that while $2,500 is the sweet spot for annual contributions due to the government grant, there is a lifetime contribution limit of $50,000 per beneficiary.
Alternatives to the RESP
Free money from the government is hard to beat, but the RESP isn’t the only way to save for your child’s education. Other options include:
- Tax-Free Savings Account (TFSA), which offers the benefit of tax-free growth on any earnings. The TFSA works similar to a bank account in that funds can be withdrawn at any point without penalty.
- Set up a trust that can only be used for education.
- Use life insurance to fund education. When you purchase a whole life insurance policy, there may be a cash savings component that accumulates and can be withdrawn, subject to the terms of the insurance contract.
A little can go a long way, and chipping away each year can help your children have the funds they need to get through their post-secondary years. Setting up automatic payments into an RESP is an effective way to ‘set it and forget it,’ and approximately $200 per month is a good target goal to help savers meet the $2,500 threshold for the maximum government grant.
In whole, the RESP is a strong contender in the education savings game, and one that all parents – particularly those with young children – should consider when it comes to helping to cover the cost of rising tuition fees.
Foresters, their employees and life insurance representatives, do not provide, on Foresters behalf, financial planning, tax or investment advice.
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