My sweet friend had a baby this fall and my dearest friend suggested that I should most definitely write something on the topic of RESP’s. Post-secondary costs are increasing constantly. What it cost me to go to University will not be what it costs my sweet children to attend. As Canadians, we are lucky that Post-Secondary has not jumped to the astronomical rates they have in the States, but it still costs a pretty penny. The fact that the average Canadian student is saddled with $30,000 in student loan debt is a huge burden to bear as a newly minted grad.
As a future mama (no I’m not pregnant) I want to make sure that I can do everything in my power to make it affordable for my child to get the education they want. Enter the RESP.
The RESP, Registered Educations Savings Plan, was introduced by the Canadian government in 1998, as an attempt to make it tax efficient for parents to invest in their child’s education.
The RESP has a lifetime limit of $50,000 per child, which means you can contribute $50,000 all at once, or over the course of their lifetime, the latter is preferred.
The RESP is a tax-deferred vehicle, which means that the tax is pushed to a future date (when your child goes to school). The benefit of the RESP is that when the money is withdrawn from the RESP it will be taxed in the hands of the student attending post-secondary. This is beneficial because likely the student will be earning a lower income that you would be and therefore their tax rate would be lower (or negligible) compared to yours.
Your child must be born to open an RESP.
Sadly you cannot open an RESP when you are pregnant, the baby must be born and have a valid social insurance number. Once opened the contributions you make will be eligible for matching from the Canadian government, this is known as the Canada Education Savings Grant (CESG).
Like I said earlier, you can contribute a maximum of $50,000 to this plan, however, it is more beneficial to contribute a set amount each year to take advantage of the CESG.
The CESG is the money that the government will add to your RESP to help grow your child’s savings. The CESG provides 20 cents on every dollar you contribute, up to $500 each year. This would mean you need to put in $2,500 per year. If you can’t make the entire $2,500 contribution you can carry it forward to future years.
The grant is available until the year the child turns 17, so that means you can get $7,200 in free money from the government.
Depending on the families income the Additional Canada Education Savings Grant may be available.
Remember the RESP is a vehicle to hold your money, and you are still able to invest the funds, and grow the amount in the account. Since we don’t know how much university is going to cost savings and growing the value of the RESP as high as possible is in the best interest of your future child.
Similar to the TFSA or the RRSP the RESP is a vehicle to hold your money, and you are able to invest in stocks, bonds and GIC’s within this account. While many parents are a bit wary of investing their child’s future education money it is important to remember that if you are investing for the long term the risk of the market will be mitigated by time. The markets go up, and down, but by investing for the long term you will see losses in your investment but you will also be able to profit from the gains.
Investing in a combination of index funds and GIC’s is a relatively safe way to mitigate your risk while still earning a half decent return; make your money work and ensure you child will have the opportunity to seize any opportunity they want.