RESP-ECT: SAVING FOR YOUR CHILD'S EDUCATION
It’s not something you want to leave until the last minute.
October 19th, 2018
By: Northern Credit Union
Kids grow up so fast. It just sneaks up on you—one moment they’re taking their first steps, the next they’re asking to borrow the car. And before you know it, they’re leaving the nest for university. When that time comes, will you be ready?
Every parent wants to help their children follow their dreams and pursue a post-secondary education. But the reality is: school isn’t cheap. To afford it, you need to plan ahead and the earlier you start saving, the easier it’ll be to afford.
ALRIGHT, HOW DO I START SAVING?
The best way to save for your kid’s education is with an RESP, otherwise known as a Registered Education Savings Plan. RESPs are tax-sheltered investment accounts that come with the added bonus of government contributions called Canada Education Savings Grants (CESG).
HOW DO RESPs WORK?
They work like this: You contribute to the RESP in the years leading up to your child’s post-secondary education. At the same time, the Canadian government will add money to your RESP account in the form of a grant called the Canada Education Savings Grant. This is one of the main benefits of an RESP—it gives your contributions a boost!
TELL ME MORE ABOUT THE GRANT?
With the basic CESG, the government grant will equal 20% of the amount contributed to a maximum of $500 per child with a lifetime limit of $7,200 per child. So, to get the $500 maximum yearly grant, you would need to contribute $2,500 for the year. However, lower income families can potentially qualify for the additional CESG and they’ll receive a grant of up to 40% of the amount contributed to a maximum of $500 per child.
GREAT, I’VE CONTRIBUTED – NOW WHAT?
Once you’ve contributed to your RESP, the money still has to be invested. How it’s invested is up to you and depends on your risk tolerance. If you’re not sure what to invest your money in or how to go about doing it, it’s best to talk with one of our financial advisors.
WASN’T THERE A TAX BENEFIT?
There sure was—that’s the second major perk of RESPs. In addition to government grants, you don’t pay any taxes on investment income earned until the money is withdrawn. And when it’s withdrawn, the tax is paid at the student’s tax rate, which is typically much lower than the RESP contributor’s tax rate. Bonus, right?
HOW DOES IT ALL ADD UP?
Let’s say you contribute $1,000 per year for 5 years. With a basic CESG, the government would grant you 20% of your contribution each year, so $200 per year for a total of $1200 each year. That means over 5 years, you’d have $6,000 instead of $5,000. Now let’s add in the compound interest: for illustrative purposes, let’s say you earn an average yearly return of 4%. Over 5 years, adding $1,200 each year (including the grant), the compound interest would turn your initial contributions into $8,219.55.
We hope we’ve answered some of your questions about saving and investing for your kid’s education. As with most big-ticket expenses, the most important thing is to start saving early and contribute on a regular basis. If you have any questions or need any help setting up an RESP, we’re here to help. Just get in touch with one of our financial advisors.