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Navigating Registered Education Savings Plans
BY JOHN J. DE GOEY
IF THERE IS one thing that seems to motivate
middle-class adults (parents and grandparents
alike), it’s the notion that they should be putting
money aside for their children’s or grandchildren’s education. Virtually everyone sees higher
education as the clearest and surest path to lifelong financial security, and federal help is available to make it more affordable.
When discussing college savings strategies,
the most important tool is the Canada Education
Savings Grant (CESG), available through the
Registered Education Savings Plan (RESP). The
CESG is a direct federal grant to anyone who steps
up to save for education. It was established to
incentivize families to help their dependents
make a go of it at the post-secondary level.
Understanding RESPs takes little time and
effort. Essentially, they can be set up by any adult
to support any child. The government will want
to know the child’s social insurance number for
cross-reference purposes in order to be sure there
aren’t multiple RESPs set up all over town for the
same child. Once the RESP has been established,
adults can apply for the CESG. The extra paperwork takes less than a minute or two to complete.
For most families, the grant is ;; cents on the
dollar up to a maximum annual grant of ;;;; per
child. Simply stated, a ;;,;;; RESP contribution
will attract ;;;; of free federal money by the end
of the month following the month of contribution
(;; to ;; days later).
One way of looking at this is to think of the
grant as a guaranteed ;; per cent return. If you
miss making a contribution (or simply start late),
there are catch-up provisions, but these are
offered only one year at a time. For instance, if a
child was born in ;;;; and no contribution has
been made to date, a parent could contribute
;;,;;; now (;;,;;; for ;;;; and ;;,;;; for ;;;;)
and an additional ;;,;;; in ;;;; (;;,;;; for ;;;;
and ;;,;;; for ;;;;) to be caught up. By the time
it’s ;;;;, ;;,;;; is all that will need to be contrib-
uted to attract the maximum CESG grant.
Note that people can always contribute more
if they like. For instance, someone might wish to
contribute ;;;,;;; for a child born this year.
There’s an allowance for that, but the contribution
would attract only the maximum grant of ;;;;.
The lifetime maximum that can be contributed
for any child is ;;;,;;;, and the maximum total
CESG money that can be accessed is ;;,;;;.
Theoretically, therefore, a wealthy person
could set aside ;;;,;;; into an RESP for a newborn. The associated grant money would be only
;;;;, but that would establish an education fund
of ;;;,;;; for a newborn. On the flip side, there
are other provisions for low-income families, such
as the Canada Learning Bond, that offer even
larger dollar amounts for families that can
demonstrate financial need.
People pay in to RESPs using after-tax dollars
(i.e., there is no tax deduction, as with a Registered
Retirement Savings Plan, or RRSP), but the proceeds are taxed in the hands of the student (who
typically has little or no income) upon withdrawal.
As with RRSPs and tax-free savings accounts, no
taxes are due on the growth of assets in the plan
as long as the money stays in the plan.
Once a child is ready to head off to school (and
any school will do—college, university, chef
school, mechanic program, etc.), all that is
required to access an RESP is proof of enrolment
in a qualifying program at a post-secondary institution. The money can be spent on anything, such
as textbooks, rent or groceries.
While participation in RESPs has been solid,
many tax experts are of the opinion that they
remain underutilized. Canadians understand
that education is important. It should go without
saying that if education is important in your
family, you ought to have an RESP in place. C
John J. De Goey, CIM, CFP, Fellow of FPSC™,
is a portfolio manager at Industrial Alliance