Having your child complete a post-secondary education is one of the proudest moments in a parent’s life. But with the costs of tuition and other educational expenses rising every year it is important to begin planning sooner rather than later. Educational expenses can be quite significant and it is becoming more expensive every year. In fact, it is estimated that over the next two decades the cost of a four-year education, away from home, could run anywhere from $70,000 to over $100,000.
One way to help cover these costs is to invest in a savings strategy that includes a Registered Education Savings Plan (RESP). An RESP is an education savings plan registered with the Canadian government that allows you to set aside money specifically for the education of your children or grandchildren. Not unlike a Registered Retirement Savings Plan (RRSP), the investment income earned within the plan grows on a tax-deferred basis until it is withdrawn. This means that as long as the earnings and grants received from the government within the plan are used for any reasonable education related expense, such as tuition, books, and living costs, withdrawals are taxable to the beneficiary (the student), not the owner of the plan; and since students typically have low income and high exemption status, the tax payable should be low or non-existent.
Under the Canada Education Grant (CESG) program, when you contribute to an RESP, the federal government will match 20% on the first $2,500 you contribute annually – up to $500 per year – for an eligible beneficiary up to and including the age of 17. Furthermore, if you contribute less than $2,500 in any given year, your unused grant entitlement can be carried forward to a future year.
You can choose from two types of Registered Education Savings Plans:
• Individual Plans have only one beneficiary, and the beneficiary can be anyone — your child, grandchild, niece, nephew, family friend, you or your spouse. However, if you have more than one child, it can be far more effective to set up a family RESP – a single plan with multiple beneficiaries.
• In a Family Plan, you can name one or more children as beneficiaries of the RESP, but they must be related to you. The primary benefit of a family RESP is increased flexibility: if one child decides not to pursue higher education, you can either name an alternate beneficiary or divide the assets in the plan among any remaining children.
