Post-secondary education is costly and will likely be much more expensive in the future. A BMO Wealth Institute report predicts that a four-year university degree could cost as much as $140,000 for a child born in 2013. To help your child pay for their education, you might want to open up a registered education savings plan (RESP).
Here are five reasons you should consider opening an RESP:
1. You want to save for your child’s education
RESPs were introduced by the federal government in 1998 to encourage Canadians to save for their children’s post-secondary schooling. You can contribute a maximum of $50,000 in an RESP per child but contributions aren’t tax deductible.
If you’re having trouble saving for your child’s education, you can use the new Canada Child Benefit (CCB), which is a tax-free monthly payment made to eligible families with children under the age of 18. The first payments begin later this month. You can get up to $6,400 a year for each child under the age of six and up to $5,400 a year for each child between the ages of six and 17. Low- and middle-income families will receive higher payments.
2. You don’t want to be taxed
Like an RRSP and TFSA, you don’t have to pay tax on capital gains and interest income as long as your investments stay in an RESP. That allows savings in an RESP to grow even faster.
And taxes don’t need to be paid on the withdrawal of contributions because you didn’t receive a deduction on the initial contribution. But the withdrawal of accumulated income (education grants, dividends, capital gains, and interest income) is taxable income in the hands of the student, who will be in a much lower income tax bracket than you.
3. You want free money
The federal government and some provincial governments will give you with a financial incentive to contribute to an RESP. The federal government’s Canada Education Savings Grant (CESG) will provide you with 20% on every dollar of the first $2,500 you save in your child’s RESP annually.
If your family has a low income, you can get an additional 10% to 20% on the first $500 contributed to the RESP annually. However, there’s a lifetime CESG limit of $7,200. You may also qualify for the Canada Learning Bond (CLB) and be eligible to receive an additional $2,000 per child.
Also, three provinces (British Columbia, Quebec, and Saskatchewan) offer their residents financial incentives if they contribute to an RESP. The British Columbia Training and Education Savings Grant (BCTESG) provides up to $1,200 per child, the Quebec Education Savings Incentive (QESI) provides up to $3,600 per child, and the Saskatchewan Advantage Grant for Education Savings (SAGES) provides up to $4,500 per child.
4. You want different investment options
Like an RRSP, TFSA, or non-registered account, there are a variety of investment options, such as stocks, bonds, exchange-traded funds (ETFs), mutual funds, or GICs.
5. You want to contribute to a relative’s RESP
Parents aren’t the only ones who can open up an RESP for their child. If you have a grandchild, niece, or nephew, you can open up an RESP for them. In fact, anyone can get an RESP for a child. You could also open up an RESP for one of your friends’ children if you’re feeling generous.
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