Sunday, October 24th, 2021

Get Good Marks for Planning: RESPs

By Tracy Theemes and Kamal Basra on May 03 2010 • Filed under Women and the Power of Money

Registered Education Savings Plans (RESPs)

It’s never too early to start planning for your children’s education, even if they are still toddlers. It’s simply good financial planning. It’s good retirement planning as well, by reducing the likelihood of parents having to dip into retirement savings, or take out loans, during that decade running up to retirement age when their children are starting to head off to college.

Enter the Registered Educational Savings Plan – RESP – a savings account allowing you to defer tax on savings income for a child’s education. While there are non-registered educational saving strategies (such as family trusts and intrust-for-accounts), an RESP offers several benefits including:

• tax-deferred growth on your investment contributions
• Canada Education Savings Grant (CESG) available through the federal government
• flexibility in education savings and planning

Making the most of your savings

The secret to growing your savings is to start early and contribute as much as you can. Beginning in 2007, there was no longer a specific annual maximum contribution. There is, however, a lifetime limit that has been increased to $50,000 from $42,000 per child. Even though RESP contributions are not tax deductible like those of a Registered Retirement Savings Plan (RRSP), your contributions are tax-sheltered during the life of the RESP.

To promote saving for a child’s education and to give a boost to RESPs, the government introduced the Basic and Additional Canada Education Savings Grant. The Basic CESG, which is deposited directly into the RESP itself, is equal to 20% of the annual contributions made to an RESP, to a maximum of $1,000 per year per child, depending on the availability of CESG carry forward. The CESG is not included in determining the lifetime $50,000 RESP contribution limit.

CESG’s are available up to and including the year in which a beneficiary turns 17, and are subject to a lifetime maximum of $7,200 per child. An additional amount of CESG is available to assist lower-income families. Qualifying net income is the same information used to determine eligibility for the Canada Child Tax Benefit. Unused additional CESG is not eligible for carry forward to future years.

All in the family or by individual

RESP plans can be set up for single beneficiaries or families. Family plans can be more flexible. They have multiple beneficiaries and funds could be reallocated amongst siblings, should one of them not attend college or university.

Flexibility with the self-directed RESP

Investors who are comfortable with a self-directed RRSP may want to take the same approach with the RESP. It offers several investment advantages. First and foremost you have greater control over the portfolio’s assets and your contribution schedule. There are little or no administration costs.

There is little restriction on eligible investments, making it similar in most respects to your self-directed RRSP. This means a knowledgeable investor can manage the account with greater control over its growth and safety, choosing a mix of securities, equities and fixed income than would be found in a managed pooled plan. With education costs rising faster than the current inflation rate in Canada, the need for above-average, real, rates of return will be an important part of the RESP’s value to the student of tomorrow.

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