RESP’s: The gift that keeps on giving
Hi Canadian Cheapo readers! I’m Kamara and I’m the writer behind The Modern Financial. I’m a financial services professional by day and blogger by night. I like to take a fresh and holistic approach to financial well-being and I’ve become good friends with Fay through our blogging endeavors. Fay has kindly asked that I write a guest post here. Thanks for reading!
It’s that time of year again! Christmas is upon us and with that comes shopping and spending more money on stuff. Stuff that probably isn’t needed. Stuff that may not be appreciated after the novelty wears off. Stuff purchased with money that could have been put to better use.
The other day I participated in a Twitter chat about kids and money. One of the questions was “what are your kids asking for this Christmas?” I don’t have kids yet myself, so I’m not really aware of what the “cool” gift is this year, but more than a few people said that their kids or kids they knew were asking for an iPad. One of the tweeters casually mentioned that her 7 year-old has an iPad! I couldn’t believe what I was reading! When I was 7, I was playing hopscotch and Barbies.
I really don’t think a child needs an iPad, and many kids already have more toys and games than they need anyway. So why not consider giving your child the gift of an education by opening a Registered Educations Savings Plan (RESP)? Post-secondary education is costly. That’s why it is important to plan for the costs as early as possible. An RESP is a great savings and investment vehicle that you can use to do this.
There are several advantages with opening an RESP, including taking advantage of investment earnings, such as interest which can compound over time. But the biggest advantage that comes with opening an RESP, is free government money. That’s right, money, paid into the RESP from the government. This money is referred to as the Canadian Education Savings Grant (CESG).
To take advantage of the CESG, your child must be the beneficiary of an RESP and under the age of 17. There are maximum amounts that the government will deposit into the RESP, depending on your contribution and household income levels. The maximum lifetime amount is $7,200 per child. That is a significant amount of money that can be obtained for simply opening an RESP, starting contributions early enough in your child’s life and maxing out your contributions enough to receive the highest possible CESG.
If you haven’t started an RESP yet, and your child is getting closer to thinking about post-secondary education, you have until your child reaches the age of 31 to make contributions (though not CESG eligible if after your child turns 17). RESP money needs to be used by the 35th anniversary of actually starting the plan.
What if your child decides not to pursue post-secondary education? Maybe they decide they want to spend life travelling. Or they entered the entrepreneurial world and realize education may not be necessary nor worth their time. The RESP money has to be dispersed and you can get your money back. The contributions you made come back to you, minus any fees you may have paid along the way. Any investment earnings within the RESP are yours as well. The downside is that you are taxed on anything over and above your original contributions. Also, not only are you taxed, but you are hit with a 20% penalty on any of the earnings within the RESP as well. This penalty can be avoided (but the tax can’t) by contributing the excess funds (investment earnings) into your or your spouse’s RRSP, provided certain conditions are met.
There are several other RESP and CESG rules which I won’t bore you with here. It’s best to consult with your financial advisor. He or she can help develop an education savings plan for your child, making the best possible use of an RESP. RESP’s are surprisingly flexible and offer that very attractive incentive – free money from the government. To get started, all that is required is a social insurance number for your child and an appointment scheduled with your financial advisor.
Anyone can open an individual RESP, where there is one beneficiary (meaning one person designated to use the money invested in the RESP for education). For a family RESP, where there can be multiple beneficiaries, the person who opens the plan must be related to the beneficiaries by blood or adoption. This includes parents, grandparents or siblings. Of course, your financial advisor can discuss the options with you.
If you’re concerned about helping your child fund their potential pursuits of higher education, I urge you to consider opening an RESP as soon as possible. By opening and contributing to an RESP, you’re giving your child a gift that truly does, keep on giving.