By: Nicole Simons
Most parents don’t want to think about it, but it’s going to happen – your little baby will be off to college or university one day. The boo-hooing isn’t only because the itty bitty toddler you once knew is now all grown up, rather it’s the sheer panic of whether your pockets can afford the big step. How much will a post secondary education cost when your child is ready? Studies show that in just over 10 years, a four-year Honours university degree will cost more than $110,000 for a student living on campus. That’s a hefty bill for the average family, so unless you have access to a pot of gold, you might want to open up an RESP.
What’s an RESP, you ask?
It stands for Registered Education Savings Plan and it’s a super smart way to save for your child’s post secondary education. Parents, relatives, and even friends can open an RESP for a child.
How does it work?
Much like a savings account you make monthly contributions into the RESP and your financial institution manages your money until that faithful day when your college kid is ready to start school. There are a wide variety of investment options available for RESPs. Your choices may include stocks, bonds and mutual funds. Some RESP providers allow you to choose the way your money is invested while others invest your money for you. It is important to do your research and pick investment options that best suit your risk tolerance.
One of the main benefits of the RESP is that you don’t have to pay any tax on the investment earnings, as long as the money remains in the plan. This allows your money to grow a lot faster. Once your child is enrolled into a qualified college or university, they can start to receive educational assistance payments (EAPs) from the plan. Your child will pay tax on EAPs – which are made up of investment earnings and government grants. The good news is your child will pay very little tax, because he/she is a student with likely no additional income.
Government Grants = FREE Money!
Another great perk of the RESP are the free government grants, yes I said it – FREE!! The Canada Education Savings Grant will pay 20% on every dollar for the first $2,500 you save into the RESP each year. That’s an extra $500 on top of your money in the first year! Depending on your household income you may also qualify for the Canada Learning Bond, which can pay up to $2000 into your RESP without you putting in any of your own money. These are some awesome benefits, ready for the taking!
What if my child decides not to go to University/College?
If your child decides not to attend post secondary education, the RESP can remain open for up to 36 years in case they change their mind. Which, let’s face it, that happens quite often. If you decide to close the RESP, all grants will have to be returned to the government and your contributions will be returned to you. You also have the option of transferring the money into your personal RRSP or replacing the existing child with another one (if your plan allows that).
Ready to open one today?
All your child needs is a SIN (social insurance number), which can be obtained from Service Canada. There is no fee to get a SIN, however you will need to show proof of identity documents to apply. Once you have a SIN you can open an RESP at a bank, credit union, mutual fund company or insurance company. The earlier you start, the faster your money will grow. And who doesn’t like to see their money grow?
Make today the day you start saving for your child’s future. Feel free to contact me with any questions you may have on the RESP program. I can show you how to receive an additional 15% towards your children’s RESP.
Nicole Simons is a licensed insurance broker in the Toronto area, who has helped many individuals and families achieve their financial goals by providing expert advice on investments, life insurance, retirement planning and educational savings plans. Talk to her at 416-566-7770 and visit www.cpnfinancial.com.