In today’s competitive skills based economy, a post-secondary education is essential. According to Statistics Canada, university graduates are now three times more likely to be employed than high school graduates, making education crucial to future financial security. Yet that education is also becoming increasingly unaffordable, with tuition fees rising faster than incomes and inflation. The Canada Revenue Agency states that the average full-time student pays $66,000 for a four year program and that this could increase to $109,000 for a child born today.
Saving a little each month in a Registered Education Savings Plan (RESP) can make a big difference to your child’s future. Boosted by both provincial and federal grants, such as the Canada Education Savings Grant (CESG), this account is tax-sheltered. This means that any income or interest your contributions earn are tax-deferred until your child withdraws them as Education Assistance Payments (EAPs) for school. These earnings are then taxed to your child rather than you – and since they likely won’t have much income as a student, this typically means they won’t owe any taxes on the earnings, getting all the benefits with none of the tax consequences.
Moreover, since the money can’t be taken out without proving your child’s enrollment in school, these tempting savings are locked in, stopping you from borrowing against them. Not to mention they also ensure your child can pick the school that’s right for them, based on reputation for their chosen program rather than how much it costs.
Alison Barth, a CERTIFIED FINANCIAL PLANNER® professional with Credential Asset Management, recommends opening an account early to maximise the benefits of the grants you’ll receive:
“In order to qualify for the maximum CESG on behalf of a beneficiary, subscribers must begin contributing $5,000 per year no later than age 11. Having said that, if contributions are delayed until age 12-15 there is still ‘free money’ to be earned in grants and therefore the RESP still represents an extremely valuable education savings vehicle in this case.”
But, as you open your RESP, bear these two pitfalls in mind:
1. Don’t over-contribute: Only a portion of your contributions are eligible for the CESG per year across all RESP accounts. So, if a loved one opens a second account for your child, you’ll need to coordinate deposits carefully. If not, you may receive too much grant money and incur penalties. To determine specific grant information and amounts, you can call the CESG program at 1-888-276-3624.
2. Don’t Forget Withdrawal Rules: Remember to withdraw all EAPs within 6 months of your child finishing school. Otherwise, the withdrawals won’t qualify as EAPs, and they will be taxed to you with an additional 20% penalty – plus you will have to return any grant money received.
In the end, make sure to consult your financial advisor to get advice that’s tailored to you. They can help you stay on track to securing your child’s bright future.
Check the CRA website for further information and our latest infographic for more useful strategies to maximise your RESP benefits: