Well, it’s September and another school year is upon us. While I may not be heading off to school my Facebook feed has been saturated with friends sending their kids to school. In honour of this occasion I wanted to bring to light a great way to save for your child’s education using the Canadian Registered Education Savings Plan (RESP).
The cost of post-secondary tuition (and beer) continues to increase at an alarming rate – the average cost tuition in Canada for 2014/15 is about $6,000 per year. Add in cost of living and school supplies the total cost can be closer to $20,000 per year.
The RESP was introduced by the Canadian government to encourage Canadians to start saving early and regularly for their child’s/dependent’s education. Via the Canada Education Savings Grant (CESG) the government will contribute a max of $500-$600 (depending on household income) to the plan each year. The grant is typically matched at 20% of contributions made by the parent. For example, if a parent contributed $5,000 in the year to an RESP for their child the government would contribute $500 in that year. The max lifetime amount the government will contribute to the plan is $7,200. (THIS IS FREE MONEY ON THE TABLE!) There is no annual maximum amount for parent contributions; however, there is a maximum of $50,000 lifetime contribution.
The CESG is available for children between the ages of 1-16 and may be available for children between the ages of 16 & 17 if some contributions have been made. That’s why it’s important to have a plan from the get go to maximize the grant money…sorry no Billy Madison’s allowed.
Once the child (beneficiary) has been enrolled in a qualified program $5,000 may be withdrawn in the first 13 consecutive months. After this time period there is no restriction on withdrawals so long as the beneficiary does not have a break exceeding 12 months (…to “figure things out” on a beach in Australia).
If the beneficiary does not end up opting for the scholarly route the contributions may be withdrawn, but you’ll lose the grant money provided by the government. You’ll also be taxed on any investment gains your contributions may have accumulated.
The original contributions by the plan sponsor are NOT tax deductible, therefore, when they are withdrawn there is no tax implication to the beneficiary OR the sponsor. Grant money and any investment income withdrawn from the plan (known as Educational Assistance Payments) will be taxed in the hands of the beneficiary/student. As most parents know, typically, the student earns under $10,000 in a year; therefore, there will be next to no tax on these EAPs for the student.
The Magic of Compounding!
Oh yes, I’m going to dive into a hypothetical example to satisfy my nerd accountant needs! Let’s say a parent contributes $2,500 each year for 18 years and received the $500 CESG grant. With a 5% annual return on investment here’s how it will look:
|Year||Parent||Grant||Total||Investment Gain||RESP Balance|
The key to success here is to plan early to take advantage of compounding returns and to make contributions that will max out the government grants. Even if your kid decides college/university isn’t for them you’ll still have access to your contributions and investment gains.
Recall that the government grants max out at $7,200. With the grants and investment income the $45,000 parent contribution is almost 100% match providing over $84k for the child’s post-secondary education. Within 20 years I figure this should cover 2-3 years education leaving the student with a little responsibility to cover the rest with summer jobs!by