It is that time of year, where all the parents cheer, it’s back to school time! This may not quite ring true for those with young children but for most people with kids it’s a great time of year. Now that back to school is in the forefront of your mind, I thought discussing a great tool for saving for your child’s education, the Registered Education Savings Plan or RESP.
A Registered Education Savings Plan is a great tool for everyone who has a child to help further their education after high school. I would believe that almost every child in this day and age with the means to do so will take some form of post secondary education. Yes many of your children will go to University and this plan will definitely help, but this savings plan is not just for kids going to University or College as it is extended to other programs as well.
So what type of school or program may my child attend using RESP money? Let’s look at the requirements: A qualifying educational program is defined as a post-secondary-level program at a post-secondary institution of at least three consecutive weeks and that requires each student taking the program to spend at least 10 hours per week on courses or work in the program. Also a specified educational program is defined as a post-secondary-level program at a post-secondary institution of at least three consecutive weeks and that requires each student, who must be 16 years of age or older, taking the program to spend at least 12 hours per month on courses in the program. To simplify, if your child is looking to advance their skills or education after high school, in most cases their RESP will help cover the costs.
Now let’s look at how the RESP works to help you save and further your child’s education. Probably the biggest benefit is the free money! For every dollar you contribute to the RESP the government will contribute 20% as well up to a maximum of $500 annually in grant money. If the net family income is below $45,916 there is an additional CESG that will pay an extra 20% on the first $500 of your contribution. For Families with a net family income is between $45,916 and $91,831, the additional CESG will be 10% extra on the first $500. Not bad you say, but there are also other areas to get even more free money for your RESP. If you live in BC (other provinces offer similar grants) and your child was born in the year 2006 or later you may qualify for $1200 in free grant money towards their education under the British Columbia Training and Education Savings Grant. There is also a total of up to $2000 available for a child under the Canada Learning Bond for lower income families that qualify.
Yes, free money is great and an attractive incentive to open a RESP, but the ability to grow the money tax free is also a very attractive feature to these plans. Depending on where you open your RESP there may be a wide range of options to invest the money in your RESP. When the time has come to use the money, there are also very flexible rules on how the money can be spent. Obviously tuition and books are 2 qualifying options for your RESP money but there are more. You can also use your RESP money towards housing, food, and transportation to name few of the options to help with the costs of attending post-secondary. For those that have more than 1 child there is also an option to roll-over any unused room to the other sibling.
Now for those parents that are unsure if their child will ever attend any programs after high school I know what you are going to ask next. What happens to the money if my child doesn’t use it? First of all there are some programs out there where you may default on the money so be careful where you open an RESP, but for most cases you are fine. In the case an RESP is to be closed, all the remaining grant money will have to be returned to the Government. The contributed amount can be returned tax free to the contributor while the growth of the contribution and grant money can either be transferred to the contributors RRSP tax free or taxed in the hands of the contributor. In short the money is still yours, minus the government grant money.
Chances are your child is going to at least attend some post-secondary education after high school and depending on the program it can be very expensive. An RESP is a great way to save for this day and it comes with many great benefits including free grant money. For those that have a late start on saving for their child’s education don’t worry. The program allows you catch up an additional year every year until you have reached your entitlement. There are of course limits and other rules to be aware of with these plans so I encourage you to talk with your Certified Financial Planner for more details. It is also important to note that not every plan is created equal and there are some particular companies out there that may have a lesser quality offering. I hope this article motivates you to look further into opening an RESP if you have not done so, as the benefits far out way doing nothing at all.
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