RESP: A powerful tool to save for your children’s education
It’s hard to believe but summer is already coming to an end and kids have gone back to school. For some parents, this means that their children have left home to pursue post-secondary education. Like most things these days, the cost of obtaining a post-secondary education is rising. A quick search on the University of Manitoba’s website estimates first year tuition at ~$5,400, not including the costs of textbooks, housing, transportation and other living expenses. If your child decides to pursue a profession such as law or dentistry, the annual tuition bill can range from ~$12,000 to $40,000! The high costs are not just for university programs. For example, year 1 of the carpentry program at Red River College will cost you ~$4,000 in tuition and supplies. With this in mind, how can parents/grandparents/caregivers plan ahead to help ease the financial burden of obtaining an education? One attractive option is opening a Registered Education Savings Plan (RESP); a special savings account for those who want to save for their child's education after high school.
The RESP was designed by the Canadian government to help incentivize families to save for their children’s education. The main advantage of opening a RESP is the ability to earn Canada Education Savings Grants (CESG) from the Canadian government. When you make a contribution into your child’s RESP, the Canadian government will pay a “matching grant” of 20% of your contribution on a maximum contribution of $2,500 per year. This means that if you deposit $2,500 into your child’s RESP in a given year, the government will add an extra $500 of free grant money into the account. Each child is eligible for up to a maximum of $7,200 in CESGs in their lifetime and thus it’s important to start saving early if you want to maximize the grant money that your children can receive.
Another advantage of the RESP is that investments within the RESP grow on a “tax-deferred” basis, with no income tax owed on any growth or grant money until the child withdraws money to use for post-secondary education. When money is used to pay for education costs, the investment growth and grant amounts that are part of the withdrawal are taxed as income to the student; usually resulting in little to no tax payable as most students have very little to no other income. Additionally, any contributions that you made into the account are able to be withdrawn tax-free, as these contributions do not receive the same initial tax deduction as an RRSP.
A RESP can be a powerful tool that families can use to help save for their children’s education. We covered some of the key advantages in this article but really just scratched the surface. If you are interested in opening a RESP or getting more information, your financial advisor is a great resource that should be able to answer any questions you may have.
Riley Love, MBA, CCS, BSc. Pharm
Partner/Financial Advisor – Love & Persson Group