The cost of educating your child is not cheap. A recent TD Economics Report says the total cost of a 4-year undergraduate degree in 18 years will be "$92,369 for students living away from home and $68,373 for students living at home" in 2009 dollars. These numbers are enough to set any parent's pocketbook on fire.
The report also highlights that the earning potential of individuals with a bachelor's degree is $18,645 higher per year than that of individuals with only a high school diploma. The price for post-secondary education may be steep, but as a parent there are ways you can help your child succeed in the future without them taking on massive amounts of student debt.
A great start is to open a Registered Education Savings Plan (RESP) for your child.
What is an RESP?
An RESP is a special savings plan, registered with the Government of Canada, that helps you save for your child's education after high school. Contributions made to an RESP are not tax deductible, but the investment earnings grow tax-free as long as they are in the plan.
When the RESP is used to pay for the beneficiary’s education, the payments are taxed in their hands. Since students make little income during their years of study, there is often minimal or no tax to pay.
Who can open and contribute to an RESP?
Anyone can open and contribute to an individual RESP. This includes parents, guardians, grandparents, aunts, uncles, and other relatives or friends.
How much can I contribute?
There is no annual limit on contributions made to an RESP but the lifetime limit is $50,000 for each beneficiary. The Four Pillars Blog offers an RESP series and a personal perspective on Contributing to an RESP.
Get the grants!
Want another incentive for starting an RESP? How about some free cash! The Government of Canada offers a Canada Education Savings Grant (CESG) to match RESP contributions each year at a minimum of 20% up to $500. This means for every dollar you put into an RESP, the federal government contributes 20 cents up to $500 per child each year with a lifetime maximum of $7,200. The CESG is only offered up until the end of the calendar year in which the beneficiary turns 17 years old.
If you're behind in RESP contributions, you may still qualify for the lifetime CESG maximum of $7,200 as there are catch-up opportunities available each year. You can find the unused grant room in your child's RESP by contacting Service Canada. Be sure to have your child's Social Insurance Number (SIN) handy!
For lower income families who qualify, there is also the Canada Learning Bond (CLB) where the government offers $500 for just opening an RESP. The CLB will then pay an additional $100 annually for up to 15 years as long as the child qualifies. No RESP contributions are required and the lifetime maximum offered through the CLB is $2,000 for each beneficiary.
How to open an RESP
Opening an RESP is simple. The first step is to apply for a Social Insurance Number (SIN) for the child to be named in the plan. Secondly, you will need to choose an RESP provider.
But before signing on the dotted line, do yourself a financial favour and become familiar with the fees many providers charge. Check out this helpful Consumer Information Guide plus these tips on Choosing the Right RESP from the Government of Canada.
RESP Deadline
The deadline for contributing to an RESP is December 31 of each calendar year.
For more information on saving for you child's education, see the Government of Canada's CanLearn.ca website.
Your Turn: Do you have an RESP set up for your child? Have any tips to share?
After recently cashing in some RESP money, I have two cautions..firstly its not as easy as it seems...the feds have a multitude of forms required before any of the money is released, so be prepared for some time consuming and confusing paperwork.
Secondly, plan ahead with your investment advisor for withdrawl day. I didn't and when I wanted cash the portfolio was so down that it just did not make sense to liquidate any securities, so I was forced to pay tuition etc. out of my own pocket...ouch! The solution is simple...start to liquidate strategically well in advance of the requirement day, and place the money in cash or cash-equivalent securities so it is easily converted to cash regardless of market conditions when needed.
Posted by: dvondersch | 12/17/2009 at 12:43 AM
Hi Kerry,
You forgot that you can go back one year if you missed the deadline. Also, if your son/daughter does not use this for post-secondary education, this can be rolled into an RRSP (up $50,000). The way RESP rules are changing, there is much more opportunity to use the money than ever.
Also, as 2008 showed, it makes sense to be a bit conservative!
Posted by: Brian Poncelet | 01/03/2010 at 06:21 PM
It is indeed a good idea to research your options when you open an RESP. Not only the flexibility in the way to save before your child reaches age 18, but also how easy it is to withdraw the money when you need it. Group RESP companies have the experience and expertise on both issues, and they take care of all the paperwork for you. Give it your serious consideration when you are shopping around for an RESP!
Posted by: resp | 09/18/2010 at 01:12 PM