Growing up in a house where our parents were a school principal and teacher-librarian, we learned the value of education at a young age. We also learned the value of a good report card! Now that we have kids, we are keen to save for their education to help them realize their career aspirations when they grow up.
Registered Education Savings Plans (RESPs) are a great tool to help fund post-secondary education for kids and grandkids. This is good news because according to The Daily released by Statistics Canada on September 8, the average tuition fee for Canadian students enrolled full-time in undergraduate programs for the 2021/2022 academic year would be $6,693.
Education costs continue to grow three to five times faster than the rate of inflation. Assuming 3% inflation, the cost of the above undergrad degree for a child born today could be over $11,600 per year. If we use 5% inflation the average annual tuition cost could be over $16,000!
RESPs have evolved over the years and offer greater flexibility nowadays, including qualifying post-secondary education programs that last three consecutive weeks.
1.Individual Plans versus Family Plans: In general, a family plan is more flexible than an individual plan. You have the ability to allocate your education savings across multiple children in a family plan, whereas an individual plan is literally only for one child. There is no risk to opening a family plan in consideration of additional children in the future. In order to qualify as a family plan, the children (beneficiaries) must all be related by blood or adoption.
2. Free money! Not many things in life are free anymore, but the federal government supports education and will provide a basic grant of 20% to a limit of $500 per year and to a lifetime maximum grant of $7,200 per child until they turn 18 years of age. This means if you save $2,500 a year, you will maximize the grant and the government will contribute $500. The government provides an additional grant for families with lower net incomes. Should a beneficiary have unused contribution room from previous years, you can contribute up to double the limit (ie: $5,000) and qualify for available grant.
3. Tax Efficient: When you withdraw from an RESP for educational purposes, there are two portions or buckets to withdraw from:
Your original contributions or Post-Secondary Education Payments (PSE)
The accumulated income, grants and growth on all assets, also called Education Assistance Payment (EAP)
No need to worry on tracking as this is done by your RESP provider. When you withdraw your original contributions (PSE), there are no tax implications as you are literally taking your own money out. The growth and grant portion (EAP) typically is taxed in the beneficiary's hands (ie: student). Because students often have little to no income, plus the availability of tuition and education income tax credits generally little to no tax is payable.
4. What if they don't go to school? With a family plan, funds can be redirected to another child attending school. Your son or daughter also has up to age 35 to draw down their RESP. Lastly, should they decide not to go to school, you can get your money out, less the provided grants with some tax implications.
5. For grandparents and family: If you are wanting to help out grandkids, nieces, nephews etc. we recommend your first step be talking to the parents to see if they have an RESP setup, then you can decide who will open the account and who can help fund the account. Multiple RESP accounts for the same children are not recommended as they do not receive any
additional grant and can lead to over-contributing complications.
Given the many benefits of RESPs, we feel they are a great tool to help provide your kids or grandkids with a post-secondary education. There are a few intricacies to RESPs which is why we encourage you to talk to an advisor to ensure you are getting the most out of your personal circumstance.
Until next time… Invest Well. Live Well.