– by Deborah Reid, FMA, FCMI –
With tuition fees for post-secondary education quadrupling over the past 20 years and other expenses spiraling upward, it is predicted that in 2032 a student’s annual average expenses, including tuition, books, shelter, food and transportation, could reach $32,000. Although there are many ways to save for post-secondary education, the Registered Education Savings Plan (RESP) offers flexibility, tax-deferred investment growth and direct government assistance to help achieve your savings goals.
The government offers a 20% Canada Education Savings Grant on the first $2,500 annual contribution. The maximum annual grant is $500, reaching a lifetime maximum of $7,200 per beneficiary. If you don’t contribute enough to warrant the maximum in a given year, the unused entitlement can be carried forward; however, the maximum grant payable in any year is limited to $1,000.
The subscriber is the person who opens the plan and makes contributions to it, and the beneficiary is the individual(s) who are designated to receive the funds for the purpose of post-secondary education. Beneficiaries must be Canadian residents, under 18, and have a Social Insurance Number. A ‘Family RESP’ allows the subscriber to name more than one beneficiary and the funds do not have to be shared equally among the beneficiaries.
There are no limits on the number of plans subscribers can establish, or the number of RESPs a beneficiary may have; however, the limit on lifetime contributions for any one beneficiary is $50,000. If both parents and grandparents make contributions for the same child, it is important to coordinate since over-contributions are subject to a penalty of 1% per month. Although the contributions are not tax-deductible, the subsequent investment earnings on RESP contributions are tax-deferred. When the plan’s earnings are withdrawn to cover qualifying post-secondary education expenses, they are taxable to the beneficiary, not the subscriber.
Once the student is enrolled the funds within the RESP can be paid out for educational expenses. Part-time students can access up to $2,500 for each 13-week semester and full-time students can access up to $5,000 during the first 13 weeks of enrollment and thereafter there is no limit on the withdrawal amount.
If a child decides not to pursue post-secondary education, another beneficiary may be selected or it may be possible to transfer up to $50,000 to a regular or spousal RRSP as long as there is available RRSP contribution room. In all instances, the original contribution will be returned tax-free. It is wise to take advantage of the 20% government grant, so consider giving the gift of knowledge by contributing to an RESP.
This article is supplied by Deborah Reid, an Investment Advisor and Financial Planner with RBC Dominion Securities Inc. (Member–Canadian Investor Protection Fund). This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Deborah can be reached at deborah.reid@rbc.com or 250.655.2884.
