RESPecting your kids: How to save for their education

If you’re a parent, you want the best for your kids – including a good education.

You’re already investing in your kids by being the awesome parent you already are, but investing financially in their education can take many forms. While there are several investment options available, one of the best ways to invest in your child’s future is by using a registered education savings plan.

Here are a few key points you should know about the RESP:

An RESP, or Registered Education Savings Plan, is a type of savings plan the Canadian government put in place to help people save for their education expenses. And usually, it’s parents saving for the university education of their kids. But depending on the type of RESP plan, grandparents and friends can also set up an RESP.

An RESP is a better method for saving for your child’s education than your average investment because:

1. It’s a special kind of savings plan that the government created to help you save up for your child’s education – tax-free. That means the government doesn’t tax you on the interest you earn from the investment.
2. No matter what your family income is, the government pays a basic Canada Education Savings Grant (CESG) of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary. These Grants are only payable if you open an account and contribute before your child turns 15 (or 16, depending on contribution amounts). There’s a maximum of $500 for each beneficiary (if there is unused grant room from a previous year it comes to $1,000), and a lifetime limit of $7,200. The government will also pay an additional amount for each qualifying beneficiary. This is based on your net family income and can change over time as your income changes.
3. For beneficiaries under 15, there are also Canada Learning Bonds – the government contributes an initial $500, and then $100 every year up until they’re 15. Keep in mind that these Bonds are eligible for children born January 1, 2004 or later and are also dependent on family income – you need to be receiving the National Child Benefit Supplement to receive it.

You can invest in an RESP any time:

• Like any investment, earlier is better, but no matter when you start investing, you’ll be getting that great tax-free status on the interest you earn with an RESP.

Anyone can invest in an RESP:

• The rules say that you can invest at any time for your child, for your own, or another adult’s continuing education. You can open an account as long as you’re over 18 and you have a social insurance number.
• Remember, it’s not just parents who can invest. Depending on the RESP, grandparents and friends can help, too.
• Family plans are the only RESP that allows subscribers to name more than one beneficiary. Each beneficiary must be connected by blood relationship or adoption to each living subscriber or have been so tied to a deceased original subscriber.

Limitations you should be aware of: 

• You can’t deduct your contributions on your income tax return, so RESPs are not like RRSPs (Registered Retirement Savings Plans) in that way. There’s no capital gains tax on RESPs, but you are still taxed on the amount you initially contribute as part of your income.
• To take money out, your child must be attending a qualified educational institution. So before you decide on a particular plan, think about what kind of education your child might want and if that falls under what the plan covers. That being said, the contributions you make (and the interest it generates) can go back to the subscriber if your child doesn’t use it for education.
• Beneficiaries generally receive the contributions and the educational assistance payments (EAPs) from the promoter. They have to include the EAPs in their income for the year in which they receive them. However, they do not have to include the contributions they receive in their income.

Contract terms differ depending on the plan, so make sure you compare them, read the fine print and find the right one before you commit. You can also calculate your RESP to help determine the cost of a child’s post-secondary education.

 

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Coast Capital Savings Federal Credit Union provides advice and service related to deposit, loan and mortgage products. Coast Capital Wealth Management Ltd provides investment and financial planning services. Coast Capital Financial Management Ltd. provides advice and service related to segregated funds, annuities and life insurance products. Worldsource Financial Management Inc. provides advice and service relating to mutual funds. Mutual fund values change frequently and past performance may not be repeated. Commissions, trailing commissions, management fees and expenses may all be related with mutual fund investments. Important information about mutual funds is contained in the relevant fund facts and simplified prospectus. Please read the fund facts carefully before investing. Only deposits held in Canadian currency, having a term of five years or less and payable in Canada are eligible to be insured under the Canada Deposit Insurance Corporation Act.