One of the biggest concerns of parents like me is how they are going to send their child to college or university. Some of you may be saying that it’s too early to think about that, especially if you just gave birth to your child just a few months ago. But believe me, with the increasing cost of post-secondary education it’s something you should start to plan now rather than later.
Registered Education Savings Plan (RESP) promises to take that financial burden from you and gives you the opportunity to get free money and grow your savings – tax-free.
So, if you haven’t already thought of opening an RESP for your child/children – think again, there are so many benefits to starting now and here’s some of the reasons why you should open an RESP for your child.
FREE MONEY
The federal government adds to your RESP savings, the Canada Education Savings Grant will match 20% of your contribution every-single-year until they turn 17, each child can get up to $500 of free money each year (up to a max of $7200). Lower-income families may also qualify for the Canada Learning Bond. If you live in Quebec, Alberta or Saskatchewan, you may also be eligible for a provincial grant. Isn’t free money reason enough to open your child/children’s RESP?
RESP SAVINGS GROW TAX-FREE
RESP growth is tax free, you don’t pay tax on any investment earnings while the funds stay in the RESP. When the money is taken out for education expenses, it will be taxed based on your child’s income – which most probably will be very low, or maybe nothing at all.
VARIETY OF INVESTMENT OPTIONS
The best way to grow your RESP is through investing. Depending on your investment objectives, risk tolerance, and time horizon, you have different investment options to put your fund. You can buy stocks, ETFs, bonds, mutual funds or segregated funds within an RESP.
ANYONE CAN CONTRIBUTE
Anyone can set-up an individual RESP for your child (not just the mom or the dad). And even if it was grandma, grandpa, aunts, uncles, cousins, godparents or other family friends who contributed to your child’s RESP, their contribution still gets the 20% matching bonus. A portion of the monetary gifts that your child receives during birthdays, holidays or graduations can be saved for their RESP while the rest will be for something they’ll like.
IT CAN STAY OPEN FOR 36 YEARS
In case your child defers their education plan after high school, you don’t have to close the account, the RESP can stay open for 36 years, they can still use the RESP money when they are ready to go back to school.
An RESP is one of the best ways to prepare for your child’s education and set them up for success. No matter how small you start for them, but the earlier you start saving the more you time that you have to save and the less student debt your child will have.
If you are worried about your child deciding to take a different path and decide not to pursue post-secondary education, that is fine, you still have other options for the funds that you saved – You can transfer the RESP to a sibling or you can transfer the money to your RRSP on a tax-free basis or withdraw it completely and pay tax on any growth (but any unused grants will be reverted back to the government.)
So, if you intend to contribute for the current year, RESP’s annual deadline couldn’t be easier to remember. You can contribute into an RESP up until the final day of the year, December 31.
That’s it, talk to your financial advisor and start that conversation about your child’s future.
Please note that this article is meant for general information only. It is not a substitute for licensed financial advice, if you want to learn more about an RESP, speak to your financial advisor or if you live in Manitoba and need a financial advisor, you can contact me.
References:
Registered Education Savings Plans – Canada.ca, accessed August 25, 2021
