Registered Education Savings Plans: How to save for your child’s education
Canada’s students are just days away from going back to school – but for those with kids heading into post-secondary institutions, it can be a costly endeavour.
A recent CIBC poll suggests four out of five parents aren’t able to accurately estimate university tuition fees. And while 76 per cent of parents said they are saving for their child’s post-secondary education through a Registered Education Savings Plan (RESP) account, many of them lacked basic knowledge about how RESPs actually work.
Most financial experts recommend RESPs as an effective way to start an education fund for your children, thanks to benefits like tax savings. Here’s some information for those thinking about opening an RESP:
How does an RESP work?
RESPs allow parents, guardians and other relatives or friends to put up to $50,000 in a plan for each child who is enrolled in qualified educational programs.
There is no annual contribution limit and the government will add a grant of up to a maximum of $7,200.
Income and capital gains can be generated within an RESP through investment in a variety of options such as stocks, bonds, mutual funds, guaranteed investment certificates and grow tax free until the children named in the plan are ready to pay for their post-secondary education.
They only pay income tax on the gains earned by the plan and the grants as they are withdrawn, which usually is low because the income of most post-secondary students is very limited.
What are the benefits?
According to financial expert Preet Banerjee, RESPs have two main benefits – you’ll save on taxes and you’ll be eligible to receive grant money from the government.
“RESPs offer tax advantages, which basically means there is more money to be put towards funding the costs of going to school, and less money going to taxes. The growth is tax free in the plan” said Banerjee.
“When it comes time to using the funds, any taxable amounts will be taxed in the hands of the student who usually has very little other taxable income, and hence may pay very little, or no, tax on the proceeds of the RESP.”
When you make a contribution to an RESP you also qualify for the Canada Education Savings Grant (CESG) – in other words, money the government adds to your RESP.
“Most people will get a grant equal to 20 per cent of their contributions added to their account, but lower income households will get even more,” said Banerjee.
“As an example, if you contributed $1,000 to an RESP over one year, you could receive an additional $200 from the government. A lower income household might get closer to $300.”
Some provinces – including BC, Saskatchewan, and Quebec – offer additional grants on top of the Canada Education Savings Grant.
Where do you open an RESP?
The easiest way to get started with an RESP is to go through your financial institution. Most offer both individual and family plans.
What happens if your child doesn’t go to post-secondary – where does the money go?
If for any reason your child does not go on to post-secondary education, any grants you received from the government would be returned. However, your original contributions would be returned with no tax consequence, because the contributions would have been originally made with your after-tax income to begin with.
Anything left over is taxed at your marginal tax rate plus an additional 20 per cent.
But it is possible to save that 20 per cent tax rate.
“It’s possible to avoid the extra 20 per cent penalty by rolling over the left over amount into your RRSPif you have room – which pretty much everyone does,” said Banerjee.
– With files from The Canadian Press
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