June 10, 2022 / Insight from Jim Watt, Senior Wealth Advisor
If you have children, or are planning to have children, chances are you have thought about them going to university, college, or technical school in the future. And you’ve also probably thought about the increasing costs of post-secondary education – for tuition, books, and living expenses.
Making the decision to start saving early for their education is both prudent and easy.
Probably the best way to save for your child’s education is by starting a Registered Education Savings Plan, or RESP. You can set up a RESP through your investment advisor if you have a Social Insurance Number for yourself and your child – the designated beneficiary.
To get started, I advise both parents to jointly open a RESP that allows for more than one child to benefit in the future. With your financial advisor, you can personalize a plan for your savings to secure the dollars required to pay for your children’s post-secondary education in the future. As with all savings and investment products, you can revise the plan as your family’s needs or situation changes.
Once you begin to contribute to a RESP, the investment income earned within the plan is not subject to tax. Only when the money is taken out and used for educational purposes does it get taxed as income at the beneficiary’s marginal tax rate, which for students may be negligible.
Over the lifetime of the RESP $50,000 can be contributed – by parents, grandparents or others. Additionally, the Government of Canada provides a significant incentive to contributions, by adding 20% of your annual contributions to a RESP through the Canada Education Savings Grant (CESG), to a lifetime maximum of $7200. That’s a big bonus!
As with most financial products, RESP returns vary according to several factors linked to the markets and investment type chosen. Here’s our general rule: the sooner you start saving, the bigger the cumulative earnings.
Your investment advisor can help you decide how to invest RESP money to provide growth over the years. Even choosing conservative options like GICs or term deposits will grow your investment when you factor in the 20% CESG grant alone.
RESPs are one way of financial planning for your children and can be part of your overall strategy of gifting during your lifetime. Talk to your advisor to see the options available to you and your family.
In future blogs, I will talk about other types of gifting and financial/estate planning that you can undertake while you are still alive.
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