The importance of Registered Education Savings Plans (RESP)

  • RESP

There’s no doubt that a solid education is essential in today’s competitive environment.  However, with the rising cost of tuition and increases in cost of living, your savings alone may not be enough to adequately cover the cost of a higher education.  Funding your child’s post-secondary education is certainly one of the greatest single investments you can make for their future, so it’s important that you educate yourself on RESPs in order to ensure you meet your child’s funding goals.

Often misunderstood RESPs have been around since 1998. The basic concept is actually quite uncomplicated: As the plan owner you can make as much as $2,500 in contributions a year per child to their RESP and receive a matching 20-per-cent grant from the federal government.

Why all the hubbub about saving for my child’s post-secondary education?

According to the Association of Universities and Colleges of Canada in August 2007 university graduates earn an average of $1 million more over the course of their lifetimes than do individuals who’s highest level of education is high school.  Economic benefits aside, a higher education will mean increased opportunities in a competitive job market, improved self-confidence and will expose your child to a wide array of material.

Those are some great benefits, and most of us will work hard to ensure our children have every opportunity.  But at what cost?  Currently in 2013 the outlay for a student’s four year education at a Canadian University in Canada is around $34,000 if living at home.  Should they want to live on residence or off-campus that cost is closer to $60,000.  Fast forward to 2025, that same four year education will likely cost you closer to $54,000 when living at home and $90,500 if living outside the family home*.  Wow.  Suddenly, putting some money aside each month may not seem like it would even make a dent in those costs.

Introducing the Registered Education Savings Plan (RESP)

An RESP allows family and friends to contribute towards a child’s education.  The fundamental benefit of an RESP is that it will allow for tax-sheltered growth for investments held within the plan itself.

Not only until the earnings and government grants (keep reading) are withdrawn for educational purposes will they be taxed in the hands of your beneficiary.  Generally, your son or daughter will pay little or no tax given the fact that they will likely be in a low marginal tax rate while in school.

Moreover, all RESPs may receive the Canadian Education Savings Grant (CESG), a federal grant that will match 20% of your RESP contributions each year up to a $500 maximum per child (subject to a lifetime limit of $7,200).  What’s more is that based on certain family income thresholds you may be able to qualify for other government incentives for those electing to start an RESP such as the CESG, the Canada Learning Bond, and if you’re a resident of Alberta, the Alberta Centennial Education Savings (ACES) Grant.

It’s a no brainer to save for your child’s brain!

An RESP is a wise choice for a number of reasons.

  1. As we’ve stated already, contributions, grant money including all government incentives can accumulate and grow tax-free during the lifetime of your plan
  2. Contributions may qualify for CESG grant money or other government incentives
  3. You have the ability to take advantage of growth-oriented investments in your portfolio
  4. If you invest in a segregated fund RESP those contracts will offer unique protection on your child’s education savings including a death benefit and maturity guarantees
  5. Certain plan providers of RESPs will even provide for an education bonus of up to 15% on the total monthly contributions depending on the age at which you enrol your child.

But there are too many options

An article published in last year’s Globe and Mail attempts to demystify the various RESP issues and options, and remind consumers that they have more options than just the bank.  Self-directed route is certainly one of those options, but if you don’t have the time or the expertise enlisting the help of a trusted financial advisor with a depth of experience and a breadth of RESP options may be your best bet.

If you have any questions about this article or would like the assistance of one of our licensed professionals, please call us at 1.416.759.5453 or email us at info@lilandinsurance.com.

Sources: Statistics Canada and the Université de Sherbrooke Financial Aid Department’s budget estimation tool

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