Registered Education Savings Plan (RESP)

The second article that I ever wrote for RCU Speak was about RESPs.  You can find it here.  RESPS are probably the best investment option to save for a child’s education, and I would hope every parent/grandparent would look into them to save for their children’s future.

The basics of a Registered Education Savings Plan are:

• Contributed money grows tax deferred, so it is not taxed until it is withdrawn, usually when the student is in a low tax bracket.
• With each contribution, up to defined limits, the RESP will receive a bonus from the government of 20% to 40%, depending on the family’s income.  This bonus also earns interest.
• An RESP can be opened for a person at any age, but can only remain open for a maximum of 26 years.  The CESG is only available if the beneficiary is 17 years old or less.
• The Canada Education Savings Grant provides anyone who invests in RESPs with an amount equal to 20% of yearly contributions, up to an annual maximum of $500 per child (and to $1,000 from $800 if there is unused grant room from previous years) to a maximum of $7,200.
• There is a maximum lifetime contribution limit of $50,000.  If you contribute more than $2,500 per year ($5,000 if there is unused room), you only receive the above mentioned amount from CESG per year, but the whole contribution grows tax sheltered.
• The child/children who is the beneficiary(ies) of the RESP must have a Social Insurance Number from the government to have an RESP.

Some additional things to be aware of:

15% of parents are saving for kids education over retirement

Good article by Jonathon Chevreau of the Financial Post about saving for retirement and children's education at the same time.  Some scary stats about how many are saving for neither one of those.

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/09/23/15-of-parents-put-kids-university-savings-ahead-of-their-own-retirement-plans.aspx

What does college and university cost?

We get this question quite a bit, especially in the fall when parents and grandparents are thinking about school.
The Edmonton Journal has a good article explaining the costs of education.  For 2009, the articles says that university tuition and books will cost about $6,500 a year, around $4,000 in personal costs, and another $11,000 for room and board if the student lives away form home.  These are general costs and will vary depending on the college and lifestyle.

http://www.canada.com/business/Post+secondary+costs/1971082/story.html

So that cost comes out to about $22,000 per year, and that's if the student lives moderately.  While there are Government Student Loans, and every financial institution has student loans (including us and our very good education loan), it's a lot better for the student to avoid all that debt by saving the money before school.  The best way to do that is through the Registered Education Savings Plan or RESP.

The basics of  RESPs are:

• You can open an RESP as soon as the child is born. 
• The money in the plan grows tax-free and the government offers special savings incentives (from 20% up to 40% depending on family income)
  
• When the child enters a qualified educational program at the post-secondary level, he or she can start drawing on the accumulated savings. 
• Only the child will pay taxes on the money he or she withdraws. Since many students have little or no other income, they usually don’t have to pay much, if any, tax when they withdraw money from their plan.

You can talk to one of our Member Service Representatives to find out more about RESPs or you can visit the following government website for more details about this very good program.
http://www.hrsdc.gc.ca/eng/learning/education_savings/index.shtml

Jerry