Originally Published On Linked In September 6, 2016. Picture from Pixabay.com.
At this time of year, most parents start thinking about what the kids need before they head into their new classrooms for the year.
A portion of those parents will start wondering if they have saved enough to pay the huge bills that come along with sending their adult-ish aged children off to post-secondary school.
For those still sending their kids off to elementary and high school, ask someone you know who’s sending their child to college or university for the first time, if they wish they would have saved more or at all for their kids. I bet you already know the answer.
For those parents that say the child is going to pay for their own education, that’s fine. It builds character.
But that doesn’t mean that there won’t be bills coming your way.
These days a post-secondary education, and we’re not talking paid internships or apprenticeships, come with a total price tag around the same amount of a decent full-time salary at an entry level position after the schooling is over.
According to this government website an average university tuition in 2013 and 2014 in Canada was $5,772 per year and going up. Today estimates are north of $6000.
Once you factor in textbooks ($800-1000 per year on the same website above), residence in first year, travel to and from school, meals, unforeseen expenses, and I hear some students like to party a little bit, I would say $20,000 per year is a fair estimate.
Enter: the Registered Education Savings Plan or RESP.
A government account type that allows investors to save for their children’s education while the government offers a grant to encourage saving.
How does it work?
You open the RESP once your little one has a Social Insurance Number and start depositing amounts in the account while the government matches a portion of your contributions.
After the account is open, you are able to deposit and collect grant money until your child goes to school or they decide not to. I’ll describe what happens if they don’t use the money in a bit.
How much can I contribute to the RESP?
Up to $50,000 per beneficiary. However, there is no limit on the growth allowed in the account on investments similar to the ones you would hold in your RRSP or TFSA.
What is the grant called and how much is it worth?
The Canada Education Savings Grant or CESG is worth 20% of the deposits to the account up to a maximum of $500 per year and a lifetime maximum of $7,200.
If I’m not able to deposit anything into the account one year, is that CESG lost forever?
If you miss collecting a portion of the CESG in a year, you can ask for that amount later years. The limit is that you can only receive $500 of the unused CESG amounts in any given year.
So, if you manage your contributions correctly, you can end up with contributions of $57,200 in a RESP that only cost you $50,000. So you have earned a return in the account before even determining what to invest it in.
Hooray free money!!!
So what happens when Johnny becomes a Rock Star and doesn’t go to school?
Simply put, you give the CESG and its growth back to the government and the rest, including the growth on your contributions, is yours.
For example, Johnny’s RESP has $70,000 in it and Johnny’s newest Polka album goes Platinum on the Billboard Charts. Johnny decides that his fame is going to carry him and he won’t need the RESP anymore.
So we decide to wrap it up.
Of the $70,000, 20% ($14,000) goes back to the government to pay back the CESG and the growth on the CESG. The remaining $56,000 goes into whatever account makes sense for the contributor.
In many cases, after the tax on the growth of the contributions is paid for, it can be rolled into an RRSP as long as the account holder has contribution room.
It’s a registered account so the contributions are tax deductible, right?
However, when the money comes out of the account in the form of income for the student, only the growth of the investments is taxable at the student’s rate.
This is important because if the income of a student is as low enough, the tax owing from a RESP withdrawal will most likely be peanuts if anything at all.
I doubt I’ll need $70,000 for school costs for one child, can it be used for anything else?
As those parents with kids in college and university know, there are many more expenses than just what the school demands when enrolling your child in their program.
For this reason, as long as they are enrolled in an approved post-secondary institution, you can withdraw the money to be used for whatever you or the student need it for.
Be it groceries, rent, gas, hiring a private detective to follow your kids*, whatever you want.
(*Please don’t hire a private detective to look in on your kids at school. You don’t want to know what they find anyway.)
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