Using RESPs to save for higher education

Education is a costly business. A post-secondary education in Canada these days is estimated to cost as much as $60,000. That’s big dollars for a lot of Canadian families.

Education is a costly business.

A post-secondary education in Canada these days is estimated to cost as much as $60,000. That’s big dollars for a lot of Canadian families.

Back in 1998, the Canadian government created the registered education savings plan (RESP), a vehicle that lets parents and others put aside money to pay for a child’s post-secondary education.

RESPs are believed to have benefitted more than three million children and account for about a third of the estimated $18 billion that families in Canada have put away for their children’s education since the program began.

RESPs are relatively easy to set up and have some tax and investment advantages.

Parents, guardians, grandparents, other relatives or friends can set up an RESP through a financial institution such as a bank or credit union, a certified financial planner or through a group plan dealer.

You can contribute up to $50,000 into the plan for each child named who is enrolled in qualified educational programs like trade schools, CEGEP, colleges or universities.

There is no annual contribution limit and the government will add a grant of up to a maximum of $7,200.

Income and capital gains can be generated within an RESP through investment in a variety of options — such as stocks, bonds, mutual funds and guaranteed investment certificates — and grow tax-free until the children named in the plan are ready to pay for their post-secondary education. They only pay income tax on the gains earned by the plan and the grants as they are withdrawn, which usually is low because the income of most post-secondary students is very limited.

There are three types of plans available.

In a family plan you can name one or more children as beneficiaries of the RESP. The children must be related to you, including adopted children, grandchildren, brothers or sisters.

An individual plan is for one person, who does not have to be related to you. There are no age limits and you can even set up an RESP for yourself or another adult.

In a group plan, your savings are combined with those of other people in the plan. The amount of money each child gets is based on how much money is in the group account and on the total number of students of the same age who are in school that year.

Group plans are offered and administered by group dealers and have their own rules. They are a good choice if you can make regular payments, prefer to have someone else decide how to invest the money, and are fairly certain the child you are saving for will continue their education after high school.

Critics say RESPs have become too complicated over the years, with too many rules and restrictions. Some complaints have been directed at group plans, which may charge enrolment, administration, investment management and other fees, and have rules athat can put the plan into default and terminate it if you are unable to make a payment.

As well, if you withdraw the money before the child pursues education after high school, you will not be taxed on the amount you contributed but you will pay tax on the gains at your regular income tax level, plus an additional 20 per cent.

RESPs, however, are still considered a good vehicle to help Canadians save money for the future.

The Bank of Montreal Retirement Institute recently called on the federal and provincial governments to permit the tax-free transfer of monies from a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) into an RESP or registered medical savings plan (RSMP) in much the same way Canadians now can roll over RRSP and RRIF funds into a registered disability savings plan for disabled children.

“With health care and education costs both outpacing consumer price increases, tax-free transfers from an RRSP or RRIF to an RMSP or RESP would help contain public sector outlays for these growing costs,” said Douglas Porter, chief economist with BMO Capital Markets.

If you’re thinking of starting to save for your childrens’ education, you may want to consult a financial professional to help you determine whether an RESP is right for you, and if it is, which option you should choose.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

Copyright 2010 Talbot Boggs

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