By Anne Chun, C.A., CFP
The cost of university tuition in Canada increases each year. It’s best to have start a savings strategy for your children’s post secondary education as soon as possible. If you have a youngster who is contemplating university, in addition to tuition, your budget needs to include rent, books and food.
One of the most popular savings strategy is use a Registered Education Savings Plan or RESP.
What is a RESP?
This is savings plan which allows a subscriber to save money for the post-secondary education of a beneficiary.
Who can be a subscriber?
Anyone, except a trust. If you are a grandparent, parent, uncle, aunt or family friend and wish to set up a RESP for a beneficiary, you can do so with your financial institution or your financial planner. Beginning in 1998, spouses may be joint subscribers to an RESP.
Who can be a beneficiary?
The beneficiary has to be a Canadian resident with a Social Insurance Number. In a multi-beneficiary plan, where there is more than one beneficiary, each beneficiary has to be related to the subscriber by blood or adoption. Blood relation includes children, siblings, grandchildren and great-grandchildren but excludes the subscriber, his/her spouse, nephews and nieces.
What is the limit?
There is a $50,000 lifetime contribution limit per beneficiary. Of the total, only $36,000 qualifies for the grant up to $7200. You can skip a year–since 2007, there is no annual limit.
What are the tax benefits?
Unlike the Registered Retirement Savings Plan (RRSP), the contribution you make into a RESP is not tax deductible. However, the interest/dividends earned inside an RESP is not taxed until they are withdrawn. Over the time period from the set up to the time when the RESP is withdrawn, this tax free compounding can be quite substantial.
What’s added incentive?
A number of items, the most significant, perhaps, is the Canada Education Savings Grant (CESG). The CESG, introduced in the 1998 Federal Budget, is an amount the government will pay into your RESP to help fund your children’s education. The CESG is 20% of the RESP contribution up to a lifetime maximum of $ 7,200.
When does this all end?
RESP contributions can be made within 31 years since its inception and cannot last more than 35 years.
The Canada Revenue Agency’s website has a lot more details on the rules.
Are there other alternatives?
Yes, you can consider setting up a bank account for your children.
Since they are minors one of the parents’ will be “in trust” of the account. However, income generated do not get tax free compounding as it does inside the RESP.