In September, close to five million students will be heading back to elementary and secondary school in Canada. At this time of year families historically spend hundreds of dollars getting their children ready for the classroom. Everything from must have clothing, the latest tech gadgets and snazzy school supplies.
But parents should also be budgeting for longer term costs their school age children may eventually have to endure – specifically, the cost of post-secondary education.
According to the latest data available from Statistics Canada the average annual tuition for an undergraduate degree in Canada today is $6,463.
That number doesn’t include other expenses like housing, food, school supplies and transportation. When you add all those costs post-secondary education can be very expensive.
For example, a survey of more than 20 thousands students done by Maclean’s magazine in 2018, found a student living away from home pays more than $80,000 to complete an undergraduate degree.
One of the ways parents can plan for this expense in their child’s life is by opening a Registered Education Savings Plan or RESP.
What is an RESP?
Introduced in 1974, the RESP has gone through many changes.
Currently it is described as a special savings account for parents who want to save for their child's education after high school. A subscriber, the person who opens the RESP at a financial institution or equivalent, can be the parent, grandparent or any adult that wants to save for a child’s post-secondary education costs. They name one or more beneficiaries under the plan.
How much can you contribute to your RESP?
Contributions are made with after tax income and investments inside the plan are tax sheltered until withdrawn. For every dollar that is contributed, a grant of 20 per cent is paid through the Canada Education Savings Grant (CESG), up to a maximum of $500 per beneficiary a year, to a lifetime maximum of $7,200. Canadians can also take advantage of other government grants such as the Canada Learning Bond (CLB), or any designated provincial education savings program.
How do I get the CESG match?
When you open your RESP, it is registered with the Canadian government. As the subscriber makes contributions, that money qualifies for the CESG. According to the government of Canada, “CESG payments are made to a single plan on a first-come, first-served basis. If you contribute through monthly instalments, the CESG is paid into each plan until either the maximum grant that can be paid in a year, or the lifetime contribution limit, is reached.”
Where can I invest my RESP contributions?
The RESP, like other registered accounts, gives investors a lot of flexibility. Once money is deposited inside the RESP parents can choose from a host of investments. This includes stocks and bonds, ETFs, mutual funds, and high interest savings accounts. The decision of where to invest should be made carefully, weighing your own risk tolerance and a timeline of when that money will be needed. You can also consult with a financial advisor that can walk you through your investment options.
How to max out your child's RESP
The Canadian government says for any account opened after 2007, there is no annual limit for contributions to RESPs. But the maximum grant you can get is $500 a year. So contributions made above and beyond that in one year will not receive the grant. There is however a lifetime limit of $50,000 that can be contributed to all RESPs for a beneficiary. To take advantage of the full benefit every year parents would have to contribute $2,500 a year. As well, there’s no limit on the number of plans from different institutions one individual can have in his or her name, but lifetime contribution limits are based on all RESPs combined.
Visit our student personal finance guide.
There are no minimum amounts a parent can contribute to their child’s RESP. But as a warning if you are making smaller contributions the financial institution where you open your child’s RESP may have transaction fees. For some parents, it’s easier to save money in a separate account and make fewer but larger contributions to the RESP when the sum adds up.
Why an RESP is the best place to invest for your child
The CESG is only available when you make contributions inside an RESP. It is money you could not otherwise access. If you’re able to contribute $2,500 each year, you can max out the $7,200 CESG by the time the child is about 14 years old.
That money inside the RESP then has years to grow. Also, the after tax money a subscriber contributes is not subject to tax.
On withdrawal, the portion subject to tax is only the grants and the gains made on the investments. This is reported on the student’s income tax return, generally speaking since students do not (usually) have high taxable income the amount of total income tax they pay on their RESP withdrawal is often minimum as well.
The bottom line
This is the second biggest shopping event for retailers. Parents are scrambling to find all the must haves for the children to start class. An average Canadian household spends hundreds of dollars getting kids ready for school. But part of the money should be put aside for an RESP too.
Statistics Canada data shows that just over two-thirds of Canadian children have savings set aside for their postsecondary education. But the average family has been unable to take advantage of the full benefit of this saving vehicle.
According to StatCan, “At the end of 2019, the average RESP amount saved for children up to the age of 4 was $5,635. This rose to $14,327 for children aged 5 to 12, and to $22,180 for those aged 13 to 17.”
The pandemic has definitely altered the way parents spend money. The focus is now on electronics for remote learning and increased need for things like PPE. But from a personal finance perspective, it is important to keep a long term view of savings for your child’s education.
The earlier you start, the more time your money has to grow. Open an RESP today and start contributing. You can do it with your bank or with a robo-advisor, or even a self directed brokerage account.
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