by Heather E. Love, BA CFA CFP® | Portfolio Manager, Investment Advisor, Odlum Brown Limited –
Without question, we want the best for our children. Wherever we find opportunities to give them an edge or advantage, we take them. In the early years, saving for post-secondary education can feel like a problem not yet in need of a solution. Your focus is on diapers, feeding and nap time, and it can hardly seem relevant to worry about which career your little one might pursue.
As both a Portfolio Manager and a new mother, I wish to outline the benefits of a Registered Education Savings Plan (RESP) and why it does not pay to wait.
An RESP is an investment plan to save money for post-secondary education. For each beneficiary, you can contribute up to $50,000 and receive up to $7,200 in Canada Education Savings Grants (CESG) over their lifetime. Each year, up to age 17*, each beneficiary can earn a 20% matching CESG, up to $500 (when you contribute $2,500). If you missed contributing in a given year, you can make up for unused CESG one year at a time.
The sooner you start, the sooner you can maximize your grants and investment growth. You may be eligible for additional grants based on family income and beneficiary ages, potentially further sweetening the pot.
Contributions are not tax deductible; however, investment income and grants in an RESP are tax sheltered until withdrawn. While contributions are withdrawn tax-free, investment income and government grants are taxable to the child, typically with negligible to no tax owing.
A common question is: “What can I use the RESP funds for?” These funds may be used toward education expenses in Canada or abroad, including tuition, books and living expenses. To access the funding, your child must be enrolled in a qualifying education program at a designated institution, including most universities, colleges and trade schools.
Another good question is: “What happens if my child does not pursue post-secondary education?” In this case, you have a number of options, but it’s important to remember that even if the funds are not ultimately used for education, the value of opening an RESP early outweighs any pitfalls and your contributions are not lost.
The key message I want to impart is that starting early and contributing consistently gives you a substantial advantage with this program. Speak with your investment advisor about opening an RESP for your children.
*There are additional contribution requirements for beneficiaries who are 16 or 17 years old.