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Saving for education

While there are many career and personal development benefits to pursuing a post-secondary education, the cost of this schooling continues to rise. As you might expect, there’s no reason to believe that this trend will change any time soon. Registered education savings plans (RESPs) are one of the best ways to save for your child’s (or grandchild’s) post-secondary education. There are two plan types of RESPs to choose from: individual or family.

Individual plans are for one child, and anyone can contribute. Family plans are for one or more children, and the children must be related to you. The key advantage of the family plan is that if one of the children decides not to pursue post-secondary education, the other children listed on the plan can use the funds.

The main benefits to RESPs include: contributions from the federal (and possibly provincial) government, tax-deferred growth, tax savings and flexibility.

Government contributions

The Government of Canada can make contributions into your RESP, up to a maximum of $500 annually per child, through the Canadian Education Savings Grant (CESG). The lifetime maximum CESG, which is payable until the end of the calendar year that your child turns 17, is $7,200.

Depending on your family income and the province where you live, you may also be eligible to receive more grants. The federal government offers the Canada Learning Bond (CLB) and the Additional Canada Education Savings Grant (A-CESG).

If your family receives the National Child Benefit Supplement, you should qualify to receive the CLB as well. The CLB is $500 and an additional $100 per year until your child is 15 years old. The first CLB payment includes an additional $25 to help cover the costs of setting up an RESP. A-CESG is for low- and middle-income families and includes an additional $100 per year until the calendar year your child turns 17. (The lifetime maximum contribution of total CESG remains $7,200.)

Provincial grants include the British Columbia Training and Education Savings Grant, the Saskatchewan Advantage Grant for Education Savings and the Quebec Education Savings Incentive. If you live in one of these provinces, consult with your financial advisor about the grants that may be available to your family.

Tax-deferred growth

Although contributions into an RESP are not tax-deductible as they are with a registered retirement savings plan (RRSP), income generated within the RESP is not taxed until funds are withdrawn. This means more money in your child’s plan benefiting from the power of long-term compound growth.

Tax savings

When money is eventually withdrawn from an RESP for educational purposes, it is taxed in the hands of the student, who is likely in a lower tax bracket. This would translate into paying little or no tax.

Flexibility

You decide when and how much to withdraw from the RESP. The withdrawals do not have to go strictly towards tuition. Rather, RESPs can be used to fund all aspects of a child’s post-secondary education, including rent, food and books.

You can use RESPs to fund more than university education, as colleges and other educational institutions also qualify (subject to certain stipulations). Additionally, your child does not have to attend full-time schooling in order to use the RESP – programs can be part-time.

From government grants to significant tax savings, RESPs are an excellent way to save for your child’s post-secondary education. It makes sense to start contributing to an RESP early so that your child has more time to take advantage of all the benefits of RESPs.

Keep in mind, if your child does not end up attending post-secondary education, or quits early, there are withdrawal penalties. When the account is collapsed, you can withdraw all of your original RESP contributions without any taxation or penalties. However, any RESP grants paid into the account are sent back to the government, and you must pay tax on the money the investment has earned.

In order to avoid the tax penalty, you can work with your financial advisor to transfer the accumulated income amount to your RRSP or your spouse’s RRSP, or transfer the money to another child’s RESP (as long as you stay within the respective contribution limits). Alternatively, you can wait to see if your child decides to enrol later, as RESP accounts can remain open for up to 36 years.

The contents of this piece are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

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