Get Help Saving for College Educations
April 25th, 2017
Annual post-secondary tuition fees in Canada continue to increase and students graduate from post-secondary studies with an average debt loads of $25,000 or more.
With the costs of education continually rising, if you’re planning to finance a college degree, you need to start planning now. The good news is you can get help from the government by setting up a Registered Education Savings Plan (RESP). The benefits of an RESP include:
- Tax deferred growth. You can contribute as much as you want annually per child until the age of 21, up to a lifetime total of $50,000 per beneficiary. All capital gains, dividends and interest remain untaxed as they compound.
- Lower Taxes. The outlays for education become part of the beneficiary’s taxable income. And since students are generally in lower tax brackets and have various tax credits, they pay little or no tax.
- Government grants. The government adds to your contributions with a Canada Education Savings Grant (CESG).
Subject to some restrictions, you can set up a plan for anyone, including a child, yourself, your spouse or your grandchildren. The plans come in several forms:
Family – There can be more than one beneficiary, but each must be related to you (or the deceased subscriber) by blood or adoption.
Non-family – There can only be one beneficiary with no restrictions.
Group – Usually offered by non-taxable foundations, these plans are administered by age groups. For example, all contracts for beneficiaries who are 9-years-old are administered together.
In a family or non-family plan, you decide how much to contribute and can interrupt the payments anytime. Group plan contributions are calculated by foundations. The amount and timing generally remain fixed.
Once you choose a plan, you need to map out a strategy. Keep these six considerations in mind:
- Lump sum annual investing. Try to invest at least $2,000 a year at the start of the year to take full advantage of compounding. You could invest more, but the government grant is paid only on the initial $2,500, so you might not get the full amount of grant money. However, you would benefit from a long period of tax-deferred growth.
- Monthly investing. You can make regular monthly contributions. The government grants are paid quarterly.
- Control. You or the beneficiary can control the RESP. But if you opt for the latter, you have no say in how the money is invested or disbursed. And you will have no recourse if the money isn’t used as you intended.
- Estate planning. You should answer the following questions: Who will take over the plan if you die? Will the beneficiary will receive the plan’s principal, as well as its earnings and grant money? What happens to the money if the beneficiary doesn’t go to a post-secondary educational institution?
- Flexibility. If the beneficiary doesn’t go to a post-secondary educational institution, depending on the plan, you can either select a different beneficiary, or you may be able to transfer the earnings on a tax-deferred basis to your own or a spousal RRSP. If you’re older than age 71, the rollover benefit isn’t available, but if your beneficiaries are the subscribers, they may be able to take advantage of it.
- Early withdrawals. You can withdraw contributions tax-free from your RESP any time. But if the money is not used for educational purposes, you must repay the government an amount equal to 20 per cent of the withdrawal, up to the amount of CESGs received.
Be Careful: RESP proceeds must be used within 25 years of the start of the plan. If the proceeds aren’t used, the grant portion is returned to the government and you get the contributions back. Investment income will be taxed at your personal tax rate, plus a 20 per cent penalty. In addition, because RESPs are trusts, contributions are subject to the “21-year-rule.”