As your children return to school you may have wondered about how you will pay for their tuition when it comes time for college or university. There was a time when college was less expensive than university. However the cost of going to college is increasing and the gap is narrowing. The common denominator is that the cost of higher education is ever increasing. One way to save for a child’s education is through a Registered Education Savings Plan (RESP).
The federal government is offering free money to Canadians who make contributions into the RESP program. They will match 20% of all contributions up to a maximum of $2,500 per year until the year the beneficiary child turns 17. No grant is eligible the year the child turns 18 years of age. This means there is $500 per year opportunity to be gained from the Canada Education Savings Grant. Unused grant room can be carried forward to future years however the maximum grant available in any given year is $1,000.
Currently RESP contributions are not tax deductible. However, any growth on the contributions and the CESG is tax deferred until it is withdrawn from the plan. When the child begins to attend a post secondary institution, the funds can be withdrawn and taxed in the hands of the child, who will likely be in a lower tax bracket then the parent, and who will usually pay less tax on the withdrawals. The child may also be able to reduce the amount of tax owing through the use of education, textbook and tuition tax credits.
You can even open a family RESP, and name one or more children as beneficiaries under the same plan. The beneficiaries must be related to the contributor either as your own children, grandchildren or legally adopted.
Should the named beneficiary decide not to attend a post secondary education there are a few options available for the RESP funds. The beneficiary can be changed to the child’s sibling. If there is no alternate beneficiary the earnings may be transferred into the contributor’s RRSP, subject to available RRSP room. The contributor can then withdraw their capital and return the grant money to the government. Another option is to make a donation to an educational institution. It is important to talk to the plan administrator or representative to determine your options in this situation.
There are many more highlights and strategies involved with using a RESP. We recommend speaking with a professional advisor about your own personal circumstance to decide the best education saving strategy for you. Through further knowledge on the subject parents will gain a better perspective in financing their child’s educational needs.
This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 613-798-2421 or E-mail at rick@invested-interest.ca.