There are many responsibilities that go along with raising children, some of them more immediate than others. But in the long journey from infancy to adolescence, the looming cost of post-secondary education is ever in the back of a parent’s mind.
And the cost of higher education is growing. The Canada Student Loans Program projects that today’s toddlers will pay approximately $17,000 in tuition per year by the time they begin their post-secondary education, not including books or living expenses.
Because of these figures, parents need a long-range plan to assist their children’s educational goals. Investment tools like a Registered Education Savings Plan (RESP) can provide a streamlined way for families to save for education costs in the future.
Subscribers to RESPs make contributions that build up tax-free earnings, and the federal government also contributes a certain amount to these plans for children under age 18. There are no taxes due until funds are taken out to pay for a child’s education. At that time, contributions made into the RESP are returned tax-free, although contributors’ earnings from the plan are taxable.
RESP providers like Children’s Education Funds, Inc. (CEFI) offer different types of RESPs, each with their own features and benefits to meet the various savings needs. CEFI offers group RESPs, which pool the contributions of all subscribers and invest them as a group into different forms of investment vehicles, such as government bonds, corporate and financial bonds, treasury bills, and variable rate and equity securities.
There are a couple of things to keep in mind when considering an RESP, points that CEFI shares here.
Calculate your need and set your goals, based on your budget. Broadly, there are two types of plans to choose from that offer flexibility for subscribers and can be extended to family members or friends, as well as parents: family plans and specified plans.
Under a family plan, investors can name multiple beneficiaries as long as they’re related to or adopted by the sponsor and under 21 when they’re named. With multiple beneficiaries, you decide how to split the funds; if one doesn’t continue his or her schooling, the RESP funds can still be used by the other beneficiaries.
Specified plans are designed for investors who are only interested in naming a single beneficiary. A specified plan does not permit another individual to be designated as a beneficiary under the RESP at any time after the end of the year that includes the 35th anniversary of the plan.
Start as early as possible. It’s never too early to start saving for your child’s education. If possible, it is best to set up an RESP at birth, although they can be established as late as age 12. All your child needs is a social insurance number. But earlier is better, because the later you begin, the harder it is to catch up on tax-deferred compounding interest. You are more likely to cover a greater portion of your child’s tuition and living expenses if you start early and maximize federal government grants, like the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).
Maximize your RESP
In order to get the most out of your savings plan, make it a point to contribute money whenever possible. Even a little bit goes a long way. On birthdays, special milestones or holidays, ask family and friends to contribute money to an RESP in lieu of material gifts. This is a great way to add to your savings and get more out of available government grants. Also, consider making consistent, monthly payments to maximize your child’s RESP.
Check out the Ontario Securities Commission website for help calculating future education costs and how your proposed savings will add up. With some careful planning and guidance from professionals, those looming costs won’t seem quite so daunting.
Published by rudds james