How RESPs helps to pay for your kids’ post-secondary education

Saving for a child’s post secondary education can seen as daunting especially given many of life’s their financial obligations.

A Registered Education Savings Plan (RESP) can be an approach for parents, friends and other family members to help save for the growing costs of higher education.

HERE IS AN OVERVIEW OF RESP’S

Simply a Registered Education Savings Plan (RESP) is a college plan sponsored by the Canadian government. Parents, friends, etc. can make contributions to the child’s RESP and the investment grows tax-free.

The Contributors to the RESP do not receive a tax deduction for the investment, and there are no taxes due until the funds are withdrawn to pay for the child’s education.

The money the government pays out is taxed to the student. But keep in mind that usually students have little to no income, so they can withdraw the money tax-free.

The government also contributes a certain amount to these plans for children under age 18 and the Canadian government caps the lifetime contribution limit of $50,000 per child/beneficiary from all RESPs combined.

With the Canada Educations Savings Grant (CESG), the Canadian Federal Government matches the savings of each dollar by 20% on the first $2,500 contributed annually to a RESP for a child who is under the age of 18. The amount of the grant is capped at $7,200 per child.

PROS OF A RESP

Tax-free compounding: All interest payments, dividends and capital gains earned inside a RESP account are not taxable. This means the parent/family members contributing to the RESP gets to keep all of the money earned, increasing the amount of money available for the child’s education. Starting a RESP account when the child is young, allows the investment to grow tax-free.

Allows to plan for the education: When starting and RESP when a child is young, this allows parents to budget a small amount every month to their child education. This affords them the luxury to not need to funnel a large part of their budget to help their child to pay for their schooling.  And by planning, often there is little or no financial demands on the parents once the child starts post-secondary education.

Decreases or eliminates excessive student debt: With student debt at an all time high, RESPs can help students to avoid any debt while in school.

MAJOR CONS OF A RESP

If a child doesn't pursue an approved post-secondary education training program, such as college or trade school, within 36 years of opening the account, the government can request the grant money back.

There are also penalties and income tax incurred on investment earnings that are withdrawn from a RESP and not used for college or vocational school.

According to the Canada Revenue Agency any investment earnings that are withdrawn from the RESP that are not used for education-related expenses incur income tax plus an additional 20% penalty.

SUMMARY

RESPs are a great way to fund a child education, just be sure that your finances are in check so that you can also manage you present budget needs and contribute to your financial future.