As a parent, you want to give your kid the gift of an education.
Education, after all, is priceless.
Unfortunately, it is also quite expensive.
Even the government knows how important – but expensive – a good education is.
That’s why when parents register the birth of a baby, they can tick a box to give their permission to be contacted about Registered Education Savings Plans (RESPs) for their child.
Mere days after a child is born, parents are being encouraged to think about something that won’t happen for another 18 years.
It’s just that important!
Saving for your child’s education could mean the difference between them accruing student debt they will be paying off well into their 30s or starting their career off in the green.
But simply socking money away in a savings account is a missed opportunity. Opening an RESP allows you to capitalize on free government money and tax savings.
Why are RESPs so great?
- The government kicks in 20% of your contributions up to a maximum of $500 of free money per year (with a $7,200 lifetime limit) in grants.
- If you’re a low income family, they will also contribute $500 one-time just for opening the plan, plus an addition $100/yr in grants.
- The grants, contributions, and investment growth are all tax-free while in the RESP.
- When money is withdrawn, it is taxable in your kids’ hands – meaning, there will likely be little to no tax paid, since students are usually in a very low (if not the lowest) tax bracket.
- RESPs can remain open for 36 years so they have time to explore, experiment, and still take their education in plenty of time to be able to keep the free government grants.
With the power of compound interest and tax-free growth, that free government money could have a significant impact on your child’s education fund.
For example, if you had $268 per month (from the Child Tax Benefit, for example!) to save for your child’s education:
Assuming a 5% compound interest rate, after 18 years in a regular savings vehicle you would have $90,473.75.
If you instead invested that same amount in an RESP, after 18 years and assuming no bonds (so higher family income), you would have $105,648.
By not investing in an RESP, you would lose out on $15,175!
In other words, just by investing the money the government already gives you for having a child (the CCB) in an RESP, you could end up with over $15,000 more for your child’s education.
But before you open an RESP and start funnelling in money, consider the overall strategy.
- If you can afford it, it’s a good idea to contribute enough to an RESP to max out the government grant money each year. After that, you can contribute to a TFSA for added flexibility, and guaranteed zero tax on growth and withdrawals.
- Adjust the asset mix as your child gets closer to attending school, to be sure that a market dip doesn’t result in losses just before tuition comes due!
- If many people are contributing to your child’s RESP, keep close tabs on the lifetime contribution – a maximum of $50,000 can be contributed, after which there are monetary consequences.
- When your child is ready to attend school and you need to withdraw the money, make sure you do it effectively to minimize taxes. Grant money is taxable in your child’s hands, and contributions have no tax consequences. Withdrawing the optimal amount from each “bucket” ensures the least amount of tax is paid.
RESPs can be a powerful tool to alleviate financial anxiety around education – for both parents and children!
Book a call to learn how to make sure you’re contributing the right amount in the right investment vehicles in your RESP to protect your child’s future.