Financially Speaking – RESPs: A sound foundation for education savings

Financially Speaking – RESPs: A sound foundation for education savings

This series of financial advice columns is provided by Philippe Pomerleau, F. Pl.
RBC Financial Planning

Human Resources and Social Development Canada (HRSDC) predicts that by the year 2019, a four-year undergraduate program away from home could cost more than $100,000.* To help you save, and give your children the gift of higher education, one of your most valuable tools is a registered education savings plan (RESP). Here’s what you need to know to start an RESP and make the most of its special characteristics.

An RESP may be set up as an individual plan with only one beneficiary who does not have to be related to you, or a family plan, which lets you name one or multiple beneficiaries. The beneficiaries under a family plan must be related to you by blood or adoption, which includes children and grandchildren, but not nieces or nephews. Both types of plans are offered through RBC Royal Bank®.

Within your RESP, you can invest in a variety of investment vehicles, including savings accounts, guaranteed investment certificates (GICs) and mutual funds. The investment income you earn with the plan grows on a tax-deferred basis until it is withdrawn.

Once the beneficiary is enrolled in a qualifying post-secondary education or training programs, the funds within the RESP can be paid out as Educational Assistance Payments (EAPs) at the discretion of the subscriber. Programs at most Canadian universities, colleges and other educational institutions qualify for the purposes of EAPs. Programs at many institutions outside of Canada also qualify. When the earnings and grants received from the government are paid to the beneficiary, they are taxable in their hands. In most cases, this results in little or no income tax payable by the student since they typically don’t earn enough income while they are in school. Contributions to an RESP are not tax-deductible and they are not taxable when withdrawn.

Government grants.

The Canada Education Savings Grant program matches 20% on the first $2,500 contributed annually to an RESP for an eligible beneficiary age 17 and under, and up to 40% for qualifying lower income earners, to a maximum of $600 annually. The maximum CESG payment in any year is $1000 per eligible beneficiary, based on contributions of $5000 or more. Children born after December 31, 2003, into families that receive the National Child Benefit Supplement can receive a $500 Canada Learning Bond. An additional $100 a year may be available up to the child’s age of 15 years. The maximum grant portion available to any one beneficiary is $7,200.

In Quebec, there is also the Quebec education savings incentive (QESI) which is a tax measure, introduce in 2007, that encourages Quebec families to start saving early for the education of their children and grandchildren. This measure consists of a refundable tax credit that is paid directly into a registered education savings plan opened with a financial institution or with another RESP provider that offers the Québec education savings incentive. The trustee designated by your registered education savings plan provider must apply to Revenu Québec for the Québec education savings incentive. Each year, a registered education savings plan account can receive an amount equal to 10% of the net contributions paid into it over the course of a year, up to a maximum of $250. Since 2008, any benefits accrued during previous years can be added to the basic amount, up to a maximum of $250. To help low-income families, an increase of up to $50 per year, calculated on the basis of family income, may be added to the basic amount. A beneficiary cannot be granted a cumulative amount of more than $3,600 for all of the RESP of which he or she is the beneficiary.

If the child decides not to pursue post-secondary education, you have several options.

If you have a family plan RESP, you can allocate the contributions and earnings among remaining beneficiaries (if there are any). If you have an individual plan, you may be able to name an alternate beneficiary. You may be able to transfer up to $50,000 of the plan’s growth into your own or a spousal RSP account where it will remain tax-sheltered, but you must have enough contribution room. You can also simply withdraw the money. The principal will be returned to you tax-free, but the accumulated earnings will enter into your taxable income for the year and be subject to an additional tax. In some instances, the grants received must be paid back to the government. The sooner you start an RESP, the longer your contributions and grants can benefit from compounding on a tax-deferred basis.

For more information you can get in touch with Philippe via the contact details below or visit his website.

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Categories: Opinion

About Author

Philippe Pomerleau

Philippe Pomerleau has worked in the financial sector for years. He is based in Quebec City and speaks English and French.

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