Let’s face it, post-secondary education is expensive. And it keeps getting more expensive as time moves on. Post-secondary education came at a significantly higher cost for our generation than it did for our parents, and it will cost even more for our kids. On a provincial level, this is one of the first expenditures to be cut when the government is looking to tighten up its budget, increasing the price tag even more.
Pretty much everybody wants their kids to have the best possible life that they can, which generally goes hand in hand with wanting them to have the best opportunities to be gainfully employed when they become adults. In today’s world, having a post-secondary education is increasingly becoming a requirement even to be considered for many professions. And this trend will only continue as our children grow into adulthood. But how do we help them to have the opportunity to attend university, college, trade school, or any other institution of higher learning? Winning the lottery would be ideal, but investing in a Registered Education Savings Plan (RESP) is a more reliable strategy.
An RESP is a tax-sheltered savings plan that helps parents, family, and/or friends save for a child’s education. An RESP can hold an array of investments, including guaranteed investment certificates (GICs), mutual funds, stocks, bonds, and savings deposits. The earnings within an RESP are not taxed unless they are withdrawn. When the child (referred to as the beneficiary of the RESP) eventually attends a qualifying post-secondary education or training program, the accumulated income within the RESP can be paid out as an Educational Assistance Payment (EAP) to help finance the cost of the program. The beneficiary will then have to include the EAP as income on their income tax return for the year in which it was received. Since students tend to be in the lowest tax bracket and can claim for education-related expenses on their federal tax return (some provinces also offer provincial tax credits), they usually end up paying little to no tax on the EAP’s that they receive.
To open an RESP, both you (as the contributor) and your child (as the beneficiary) will need a Social Insurance Number (SIN). Parents can apply for a SIN for newborn babies, which means that they can start saving in an RESP right away. An RESP can be opened with most financial institutions (such as banks and credit unions), financial planners, and group plan dealers. You can contribute to an RESP for up to 31 years. Unfortunately, there aren’t any tax breaks for making contributions to this type of registered savings plan. The plan can stay open for a maximum of 35 years, so there’s no need to panic if your beneficiary decides that they want to take a bit of time between finishing high school and starting their post-secondary education. There are no limits on annual contributions, but there is a maximum lifetime contribution limit of $50,000 per beneficiary.
There are also government grants available to supplement an RESP:
· Canada Education Savings Grant (CESG) – This grant matches 20% of the first $2,500 contributed in a year to an RESP, to a maximum of $500/year. The CESG gives a maximum total of $7,200 per beneficiary. Children from middle and low-income families may be eligible for the Additional amount of CESG (an extra 10% or 20% added to the first $500 contributed to an RESP each year) depending on the adjusted income level of the child’s primary caregiver.
· Canada Learning Bond (CLB) – The CLB provides up to $2,000 to help modest-income families save for their child’s education, based on the number of qualified children in the family and the adjusted income of both the primary caregiver and a cohabiting spouse or common-law partner. The CLB contributes $500 for the first year of eligibility and then $100 for every year that the child continues to be eligible (up to and including the benefit year that they turn 15).
· Provincial Education Savings Programs – There are provincial incentive programs available in Quebec (Quebec Education Savings Incentive), Saskatchewan (Saskatchewan Advantage Grant For Education Savings), and British Columbia (BC Training And Education Savings Grant Program).
If the beneficiary does not end up pursuing post-secondary education, there are a few options for what can be done with the funds that have built up in their RESP:
· Families with more than one child can name one of their other children as the beneficiary so that the RESP transfers to that child.
· Under specific rules, the RESP funds can be transferred to a Registered Retirement Savings Plan (RRSP).
· The funds from the RESP can be withdrawn by the contributor and the plan closed out. The government contributions to the plan would have to be paid back in this case, and there would be a significant tax burden on any of the plan’s earnings. The plan’s earnings are referred to as “accumulated income” and are taxed at a rate equal to the contributor’s regular tax bracket plus 20%. This tax can be reduced if the contributor is eligible and able to transfer the accumulated income to an RRSP. The funds that had been contributed to the plan would be returned tax-free as the contributor did not receive a tax break when the contributions were made.
Ask your financial institution of choice about their RESP program to start saving for your child’s future today.
Dean LaBerge, Local Journalism Initiative Reporter, Grizzly Gazette