Investing in Your Child’s Future: A Guide to RESPs

Investing in Your Child’s Future: A Guide to RESPs

 

 
Investing in your child’s post-secondary education is investing in the future.
 
Education is the key to progress. No matter your political leaning, socioeconomic standing, or religious affiliation, this fact is agreed upon by scholars, industry professionals, activists and nearly all groups of people around the world. Education is the backbone of social and economic development.
 
Receiving a quality education gives you the fundamental knowledge you need to form a basic understanding of the world, opens you up to diverse perspectives, and provides you with the necessary tools to critically analyze situations and solve problems.
 
Looking at the vast wealth of research conducted over the past few decades that explores the value of post-secondary education, we see positive and promising conclusions. Research shows that post-secondary education enhances an individual’s personal and professional development; can lead to a more successful and fulfilling career; can significantly increase their earning potential, and ultimately result in greater financial stability and wellbeing in the future.
 
Given the undeniable value that comes from receiving an education, as a parent, you are likely hoping that your child will choose to pursue some form of higher-level learning after graduation from high school. Before exploring education savings plans, it is helpful to understand a few key features of Canada’s current landscape. This understanding will help demonstrate just how crucial incorporating an education savings plan into your family’s financial plan really is.
 
 
Education’s current landscape in Canada
 
Cost of education.  The cost of education in Canada has significantly increased in recent decades. A recent study revealed that between 1993 and 2016, the average cost of tuition for a Canadian undergraduate student studying at a qualifying post-secondary institute nearly tripled. As of the 2018/2019 academic year, the average cost of tuition for full-time undergraduate programs increased 3.3% from the previous academic year to be $6,838.
 
Credential inflation.  Not only is tuition and other costs associated with higher-level education continuing to increase, but the Canadian job market is also experiencing something called ‘credential inflation’. Credential inflation refers to the devaluation of academic or educational credentials over time. Essentially, a job that once only required a high school diploma now requires a Bachelor’s degree. This credential inflation has increased the competitiveness of the job market and resulted in many young people seeking to enhance their marketable skills and qualifications.
 
Between the rising cost of education and the job market’s demand for candidates to hold higher qualifications, the need to incorporate education planning into your personal or family wealth management plan has never been more apparent.
 
 
Basic overview of Registered Education Savings Plan (RESP)
 
In Canada, the most common education savings tool for parents is a Registered Education Savings Plan (RESP). The main function of the RESP is to help you save for your children’s post-secondary education through tax-sheltered investment growth, government financial assistance, and other beneficial mechanisms. RESPs have proven to be an effective and tax-efficient way to contribute to, and promote higher-level learning for your children.
 
One of the most notable and appealing benefits of the RESP is the accounts’ ability to allow all earnings, including capital gains, dividends, and interest, on the investments inside the RESP to accumulate tax-free until the point of withdrawal. Further, if you are eligible to receive the government grants and bonds associated with RESPs (discussed below), these funds are also able to grow tax-sheltered in your RESP.
 
Personal contributions that are made to your RESP are not tax-deductible, meaning that any contributions that are made in a given year will still be included in your overall income and taxed accordingly. When it comes time for the beneficiary to withdraw from their RESP, withdrawn funds are considered non-taxable income.
 
As the cut-off to make RESP contributions for the 2019 year quickly approaches, now is the time to review exactly what an RESP is, the benefits of the program, the process of opening, contributing to, and withdrawing from an RESP.
 
 
Setting up an RESP
 
You can open up an RESP account for your child, yourself, or another adult. The person that opens up the account is known as the ‘subscriber’. The subscriber is typically the individual that makes the contributions to the RESP.  As previously mentioned, the subscriber cannot deduct their contributions from their income on their income tax and benefit return.
 
The party that pays out the contributions and the income earned on those contributions is known as the ‘promoter’. The promoter is typically the bank or financial institution that sets up your RESP.
 
Lastly, the RESPs ‘beneficiary’ is the student if their enrolment at a post-secondary institution is accepted and carried out. The beneficiary must be a Canadian resident and have a valid Social Insurance Number (SIN).
 
 
Contributing to your RESP
 
Personal contributions.  As of 2007, there is no annual contribution limit if you are contributing to an RESP. There is, however, a lifetime limit of $50,000 that can be contributed to RESPs belonging to a single beneficiary. This means that if an individual is the designated beneficiary of multiple RESPs, the total contribution amount across all RESP accounts cannot exceed $50,000. Contributions can be made to an RESP for up to 31 years after the date it is opened.
 
Government contribution: Canada Education Savings Grant.  In 1998, the government implemented the Canada Education Savings Grant (CESG) which serves as a special financial incentive for parents, family, and friends to save for a child’s post-secondary education. The amount of CESG you are eligible to receive from the government depends on the total personal contributions that are made to your child’s RESP. Under the CESG, the government will directly deposit a grant equivalent to 20% of your annual contribution to your RESP, up to a maximum of $500 a year. If you don’t contribute enough in a given year to qualify for the maximum $500 in CESG, the unused entitlement can be carried forward to the next year. There is a lifetime limit of $7,200 that one beneficiary is eligible to receive from CESG.
 
Government contribution: Canada Learning Bond. Another financial incentive created by the government to encourage parents to save for a child’s future education is the Canada Learning Bond (CLB). No personal contributions need to be made to an RESP to receive the CLB. The government will contribute $500 in the first year of eligibility and $100 each year the child continues (up to and including the year they turn 15). The maximum an individual can receive is $2,000. This program was designed for lower-income families – check your eligibility here.
 
 
Deadline to contribute to your RESP
 
Missing a deadline is especially unfavourable when the deadline you fail to remember has the ability to affect future earnings you could earn on your investment. Remember: the quicker you put money into your RESP, the quicker you begin earning income on that principal investment. By contributing regular amounts of $2,500 each year, you are also taking advantage of the maximum $500 CEGS annual allowance that you are eligible to receive each year. Failing to contribute to your RESP for several years and then contributing $10,000 in a single year, for example, will result in you missing out on government contributions because of CEGS annual limits.
 
If you would like to make a contribution to your RESP for 2019, you must initiate your deposit by December 31st, 2019. By failing to meet this deadline, you may potentially miss out on assistance provided by the government in the form of matching programs, and decrease the time your investment income has to accumulate in your account.
 
 
Withdrawing from your RESP
 
When funds are withdrawn are used for education purposes
 
Once the student is enrolled in a qualifying post-secondary education or training program and the promoter of the RESP has received confirmation of enrolment, the funds within the RESP can be paid out to the beneficiary. Personal contributions that were made by the subscriber or other family and friends can be withdrawn and paid out to the beneficiary tax-free. In addition to the personal contributions, any grants, bonds, or accumulated investment income, also known as Educational Assistance Payments (EAPs), can be paid out to the beneficiary. Unlike the personal contributions, however, these payments must be claimed as income on the beneficiary’s tax return.
 
When funds are withdrawn are not used for education purposes
 
In the event that you have an RESP for a child that doesn’t end up pursuing post-secondary education, you can still withdraw all of your personal contributions tax-free. Any grant or bond money that the government contributed to your RESP must be repaid. Investment earnings can be withdrawn from the RESP (if the RESP has been open for a minimum of 10 years) but are included in your taxable income for that year.
 
 
Conclusion
 
To summarize, considering the rising costs of education in Canada and the increasingly competitive job market, the need to incorporate your child’s education into your family wealth management plan has never been more evident. RESPs allow your savings to accumulate tax-free and give you the opportunity to receive free money from the government. 
 
As the contribution deadline approaches, if you find that you have any questions regarding your RESP or other family financial planning needs, please don’t hesitate to reach out to the Bongard Wealth Advisory Group for assistance. We’re always here to help.