Saving for your child's education -
Registered Education Savings Plans
Parents,
consider your children for a moment.
Sure, they may be little now, but they will grow up. And as they grow they'll form lots of
opinions, learn more about the world around them, and absorb their surroundings at an
astounding rate. It's inevitable.
Another inevitability is the wonderful and scary event known as high school graduation. Do
you remember it? Perched on the edge of your future, full of hopes, dreams, and
anticipation.
The first thing on the minds of many graduating high school student is the next big step
in their lives...going to university or college, perhaps in another city, maybe even in
another country!
You'll have taught them well if they realize a good education is essential if they are to
fulfill their hopes and dreams. But will you be financially prepared when they actually
want to go and earn a diploma or degree?
We have one piece of advice - start saving now! And one of the best ways to save is with a
Registered Education Savings Plan, or RESP.
What makes an RESP a terrific education savings tool? Take a look at these benefits:
The
government will contribute a generous 20% of what you put into an RESP for each child
every year, up to an annual maximum grant of $400 per child under the Canadian Education
Savings Grant program.
The money
you earn inside an RESP is allowed to grow tax-free. That means 100% of the money you make
on the investments inside your plan can be reinvested. This tax-free compounding can
really help build up your RESP over the years.
Any earnings
and grant money your child withdraws from the plan for qualifying educational purposes is
taxable in their hands. But in most cases, with all the deductions available to students,
not to mention their typically low income, the money will be taxed at a very low rate or
not at all.
Here are a few key facts about how RESPs work:
The maximum
you can contribute per year is $4000 for each eligible child.
If you miss
a year or two, or don't put in as much as you want, you can catch up on your contributions
(and the corresponding grants, up to the usual limits) in future years. However, you're
still limited by the annual contribution limit of $4000 per beneficiary. Contribution room
cannot be carried forward, but the grant room can accumulate whether or not the child is
currently a beneficiary, and any unused contribution room is carried forward.
RESPs can
stay open for 25 years - 21 years paying in to save, and four years paying out to fund an
education.
You can name
more than one beneficiary to a plan by opening a "family RESP".
All
beneficiaries have to be under the age of 21 at the time they are made beneficiaries in a
family plan.
The
government grant is available until the end of the year in which a child turns 17, making
the lifetime maximum $7,200 per child.
If your
child doesn't pursue a post-secondary education, you have some attractive options for what
you can do with the investment earnings.
A Social
Insurance Number is required for each child you name as a beneficiary to an RESP in order
to register the plan with the government and to be eligible for the government grant.
Starting a plan early will ensure that you're putting time to work for you. Years of
contributions from you and the government, plus the effect of long-term compounding, will
take much of the financial burden off your shoulders when the time comes for your child to
head off to university or college.
No
School?? What About the RESP Money?
Your
Child's a Millionaire at 19 - or hoping to be - and Won't be Using Their RESP, So What Can
You Do With It?
Your
19-year-old just...
What do you do
with the thousands you have sitting in an RESP, waiting to be spent on his education?
Well, don't worry, as all is not lost. In fact, you may be able to hang on to most of your
educational savings.
You have two
basic options.
The first is to let another student in the family take advantage of the funds. All you
have to do is change the beneficiary named in the plan. Just as before, the money is
controlled by you, but taxed in the hand's of the new beneficiary when it's withdrawn.
Another possibility is to transfer the assets to another RESP. However, you have to ensure
that your contribution doesn't cause the $42,000 lifetime contribution limit for that
beneficiary to be exceeded. The lifetime contribution limit for the replacement
beneficiary is not a concern in the following situations:
The
replacement beneficiary is the brother or sister of the original beneficiary, and is under
21, or
Both
beneficiaries are connected by blood relationship or adoption to an original subscriber
under the RESP, and neither is over 21 years of age.
In both
situations, the contributions for the original beneficiary will not be included in
determining the annual and lifetime contribution limits for the replacement beneficiary.
The second
option is to simply close down the RESP. Here's how to do it and hang on to as much of the
money as possible...
If you have received any money under the government's CESG (Canada Education Savings
Grants) program, that money has to be repaid - no question about that. Your own
contributions are simply returned to you.
The money that's left over is known as the 'growth' portion. This is the money that has
been earned on the investments bought with your contributions and any grant money over the
years.
As the planholder or subscriber, you have three choices of what to do with the RESP's
earnings:
You can
choose to receive the money. However, be warned that this income payment (called the
Accumulated Income Payment or AIP) will be taxed at your marginal tax rate just like your
regular income. In addition, there is a 20% penalty on these payments, over and above your
regular tax rate (12% if you live in Quebec.)
You can only choose this option if all of the following conditions are
satisfied:
The
plan has been in existence for at least 10 years
The beneficiary is over 21
No beneficiary is attending school
You are living in Canada
You are a subscriber of the RESP
If you meet
the conditions listed above, you can also choose to transfer some or all of the money into
your RRSP or a spousal RRSP, as long as you have the RRSP contribution room available. Of
course, if you can see a couple of years ahead of time that your child will not be going
the post-secondary school route, you can simply hold off on your regular RRSP
contributions in order to build up extra contribution room. And no matter how much unused
RRSP contribution room you have, the maximum you are allowed to transfer is $50,000. The
deduction for the RRSP contribution must be claimed for the year in which the AIP is paid.
You can
donate the money to an educational institution. However, you won't be able to claim a tax
deduction for the donation, since the donation is considered to be made by the RESP trust,
not by you.
As you can
see, even if your child doesn't end up going to university or college, there's often
little financial downside to opening an RESP. You'll benefit from having use of the
government grants to boost the growth of your plan, even if you eventually have to give
them back. And with a little planning, you can safeguard some or even all of the profits
you've earned in the plan. |
