Registered Education Savings Plans. Investment Objectives for Post-secondary Education
Autumn has arrived and the trees have exchanged their vibrant green jackets for ponchos of gold, orange and red. This annual change of the seasons has inspired me to reflect upon (and appreciate) the different stages of life. It has also reminded me that Registered Education Savings Plans offer a different investment plan that can assist families during these different stages.
For example, Registered Education Savings Plans or RESP allows parents (or other contributors) to put money aside for their children’s post-secondary education. The savings grow tax-free in the RESP until they are withdrawn and when the funds are withdrawn, they are taxed in the hands of the student, not the parent. As an added bonus, until the student is 17, the Canadian government will top up parents’ contributions through the Canada Educations Savings Grant or CESG. This grant is worth 20% of the first $2,500 of annual contributions made to an RESP.
Entrepreneurs may find it difficult to contribute the same amount of money each year to Registered Education Savings Plans given that some years generate more profit than others. Fortunately, the Canadian government allows you to carry forward unused CESG contribution room. Since 2007, there has been maximum CESG carry forward of $500 per year. Should you make a contribution in excess of $2,500 any year, you use up a portion of your future carry forward pool. The ability to use carry forward room is limited to 20% of the first $5,000 of RESP contribution made in any given year (or $1,000).
Even if you are a young family that doesn’t have a lot of extra money, think about contributing the Universal Child Care Benefit to the Registered Education Savings Plans. You would save over $18,000 for your child just by using this monthly amount of $160 per child between the ages of 0 to 5, and $60 per child ages 6 to 17. Add to that growth of the investment and 20% contribution by the government each year, and even with a moderate return of 3% or 4% per year, you will have quite a lot of money put aside for your child’s college or university education.
* Be sure to apply for a Social Insurance number for your child in order to open the Registered Education Savings Plans.
* The lifetime maximum contribution to an RESP is $50,000 per beneficiary, and the maximum CESG is $7,200.
* The CESG is only paid up to and including the year that the child turns 17.
As you can hold mutual funds, stocks, bonds and cash inside the Registered Education Savings Plans, it is wise to consult me here at Assante on how best to maximize returns in the early years, and how to structure the Registered Education Savings Plans in later years when withdrawals will be needed.
Your children will grow up fast; I know mine did. Don’t put off collecting that extra 20% from the CESG and making it grow along with your contributions.
It’s just good advice!