Kicking off the school year with RESPs

With the new school year kicking off and kids headed to classrooms, now is a great time to start thinking about how prepared you are for their future education. While it may seem far away, planning for your child or grandchild’s post-secondary education early on can pay off big over time.

Costs for post-secondary education – universities, trade schools, colleges – are rising every year. According to Statistics Canada’s 2020-2021 figures, the average national one-year cost of university for students in residence was $22,730 and $11,330 for those living at home, which is expected to rise to $32,942 and $16,165 for children born in 2021. For those wanting to help support their children with the costs of post-secondary education, an RESP account can be a critical savings and investment vehicle.

Why should you consider a RESP?

The registered education savings plan was created in 1974 by the Federal Government to encourage parents to save for their children’s post-secondary schooling. As a savings and investment vehicle geared towards students, there are numerous benefits RESPs have over other savings plans. These include:

• Tax-deferred growth. You can contribute up to $50,000 per child to an RESP without any taxes payable on the money earned (i.e. accumulated income, Canada Education Savings Grants, Canada Learning Bond, Provincial Grants), until it is used. When the money is withdrawn, income earned is taxed at the student’s tax rate – which could be minimal as most students have little or no income.
  
• Government grants. To compliment existing funds saved or invested, the government will contribute 20% on every dollar up to a maximum grant of $500 a year. You can utilize this annual grant for a total grant contribution of $7,200. Low income families can also benefit from additional grants provided through the Canadian Learning Bond.

The title “savings plan” is slightly misleading, as parents are also able to invest within their child’s RESP and rely on the power of compound interest to grow the plan significantly. For example, if you invested $210 a month for the first 15 years of your child’s life in a diversified investment fund at an average annual compound interest rate of 6%, at the 16-year mark, your child would have $58,655 in their account, excluding the additional government grants.

What if my child decides not to go to post-secondary?

If your child decides that they do not want to pursue post-secondary education, you are allowed to keep the account open for up to 36 years. If you know for sure that your child will not be attending a post-secondary institution, you can withdraw the contributions you have made to the account with the accumulated interest earned on these contributions, taxed at your marginal tax rate plus 20%. You can also transfer up to $50,000 of your contributions to your RRSP, if you have the room.

How do I create an RESP?

Start by contacting your financial advisor or financial institution. Most banks, credit unions, mutual fund companies, investment dealers and scholarship plan dealers offer RESP accounts. Additionally, financial advisors and robo-advisors can help you open an account and recommended a suitable portfolio of investments for your child. Always remember to check the registration of any individual or firm you plan to work with. 

Just like when you held their hand on their first day of school, your investment in an RESP can provide invaluable support to your child as they complete their scholastic journey.