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RESPs: The Gift That Keeps on Giving

Finding the perfect gift for the little ones in our lives gets harder and harder every year. It’s challenging to strike the balance between a gift that a child wants and one that won’t drive the parents crazy. If you’re wracking your brain over a thoughtful gift, there is an option any parent will gratefully accept: A contribution towards a child’s registered educations savings plan (RESP).

The cost of post-secondary education

Parents often experience sticker shock when faced the cost of post-secondary tuition. According to Statistics Canada, tuition rates have increased by 40% over the last 10 years.

In its latest report, StatsCan found that students paid $6,373 for full-time undergraduate programs in the 2016/2017 school year. Increasing by about 3% over the previous year, the figure doesn’t include basic living expenses such as housing, food, and transportation.

The future cost of education isn’t any more encouraging. The cost of a four-year degree could reach $140,000 for a child born in 2013, according to a BMO Wealth Institute report.

Contributing to an RESP

The RESP is an investment account used primarily by parents to save for their children’s post-secondary education in Canada. Money saved and invested in an RESP grows tax-free. The account can hold a variety of different types of investments, including stocks bonds, mutual funds, and GICs. When the child enrolls in a qualifying program at a trade school, college, or university, he/she can start taking educational assistance payments (EAP) that draw down from the account.

There is a significant advantage of saving for a child’s future education in an RESP. The federal government also makes contributions through the Canada Education Savings Grant (CESG). It provides an additional 20% on contributions up to a maximum of $2,500—that’s up to $500 each year. If not used in a given year, the CESG top up can be carried forward and applied to future contributions.

More than one RESP account can be opened per child, of which there are three types to choose from: Individual, family and group accounts. The type of account dictates who can open and make contributions to the plan.

The individual plan is meant to pay for the education of a single child, also called the beneficiary. This plan can be opened and contributed to by anyone including direct relations, extended family, and friends.

Family plans can have more than one beneficiary but only someone directly related to the child can open or contribute to the account. This includes adoptive parents and grandparents but excludes extended family and friends.

Group plans are a little more complicated. They’re all subject to different rules. Similar to an individual plan, they can be opened by anyone for a designated beneficiary but the contributions are subject to the terms of the plan’s agreements. This could mean regular contributions over a specified period and penalties if contractual obligations aren’t met.

Despite restrictions as to who can contribute to the family or group plans, monetary gifts earmarked for RESP contributions are a good option for those not directly related to the child.

Keep in mind that the maximum contribution that can be made to an RESP for a child is $50,000, regardless of the number of accounts, type of plan or number of contributors. Any single contribution over $2,500 in a given year could potentially impact the amount earned from the CESG.

The last word

A small gift—with a little help from the CESG, invested over 18 years—can go a long way in giving parents with peace of mind over the rising costs of tuition. If you’re considering on making a contribution to an RESP as a gift, reach out to the parents for some information. They would likely appreciate the chance to provide feedback on what would work best in their situation. That special child you have in mind will have new opportunities afforded by a post-secondary education as each contribution grows over time. In that sense, an RESP is truly a gift that keeps on giving.

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