With the increasing cost of post-secondary education
in Canada, an undergraduate student living with his or her family spends more than ten thousand dollars on
tuition alone. Parents can reduce some of this burden by opting for Registered Education Savings Plans
(RESPs) for their children.
An RESP is a tax-deferred investment account where you can start saving for your child's education, through
which you can pay some or all of the post-secondary educational costs of your child. The money invested grows
tax-free until the time the beneficiary or the student withdraws it. Upon withdrawal, though, the money is
subject to tax on interest; however, most students do not have to pay as they are in a low-income
bracket.
There are different types of RESPs, namely family, individual and group plans, amongst which you can choose
as per your requirement as well as budget. People generally select the family RESP, which can only be opened
by a family member for another family member under 21 years of age. The RESP can cover more than one
individual; however, this cannot exceed beyond a period of 25 years. If there is a significant age gap
between your eldest and youngest child, the latter may not be able to take advantage of this plan.
In contrast, the individual RESP is a flexible plan that any person can open for any other person. If you
plan to go back to school someday, you can open an account for yourself as well. Both family and
individual RESPs can either be professionally managed or have self-managed plans. Some view the self-managed
plans as more beneficial as they do not have to pay fees to a professional.
The group plans are similar to mutual funds, where your money, along with that of others, is invested in
low-risk fixed income investments. In these plans, also known as pooled trust or scholarship trust RESPs, you
either sign a contract to make regular payments over time or buy shares.
Parents or family members can make an annual contribution of up to $4,000 per child, and an overall lifetime
contribution of $42,000 per child. The contributions made to the plan enable tax-free income. As per the
latest Canadian Education Savings Grants (CESGs), the government makes a contribution to the plan that is
equivalent to 20% of the RESP contribution per year per child. The maximum contributions amount to $400/year
and $7,200 for the overall period for each beneficiary.
These contributions, administered by the plan trustees, are made directly to the plan. Once the beneficiary
enrolls in a qualifying educational program, the income of an RESP, including CESGs as well as the income
earned on CESGs, can be paid out to him or her. Moreover, the principal payment withdrawn by the students are
not taxable, while upon receipt the income and the CESG payments are taxed. As most students have little or
no income, however, the tax imposition is also either low or nil.
Start the plan early as you can invest more and benefit from years of compounding. Find a reliable RESP
provider, such as banks, financial institutions and credit unions, and open a RESP to financially aid your
child's education.•
Photo courtesy of www.sxc.hu/profile/Vixs