the Saving for Education Issue: 
Why the RESP?
August 2014

Take advantage of the Canada Education Savings Grant Program with the RESP

 

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University of Toronto 2014

When your little ones take their first step out the door to begin their educational

journey, the last thing on your mind might be financially preparing them for university or college. Picking up school supplies and new clothes this August? Consider picking up some information on the benefits of a Registered Education Savings Plan, spreading the

burden of savings over as long as possible. Take advantage of compounding interest, and also the  Canada Education Savings Grants and Bond programs. The federal government will provide a grant of 20% on the first $2,500 contributed to the RESP each year, to a maximum of $500.00. These grants are not available on a non-registered investment, so funds must be held within a Registered Education Savings Plan to qualify. Depending on your family income, you could be eligible for an additional 10 to 20% grant with the

Additional Canada Education Savings Grant.


Rising Post-Secondary Education Costs: Statistics

By the numbers

The cost of education in Canada rose a staggering 49% between 2003 and 2013*. In a recent social media survey, Specialty Wealth & Financial asked fans to recall the cost of their education, and in what year. Here are some of their responses:

 

w " I recall it was approx $2,500 for a year of private college in 1986, my husband paid about $2,000 for Ryerson."

w " I was in university from 2003-2007 and it was $5700 for tuition and fees per year (no books). "

w " Undergrad in early 1990's was about $2500/year tuition."

 

Our research of today's estimated cost of education at popular Carleton University in Ottawa reveals a much higher number than the average of $3,175 from our informal survey. For example, Carleton's estimated total 1 year of expenses for the MBA program in 2014, including tuition, campus living, books, groceries, transportation and miscellaneous expenses is posted as $22,800 to $25,314.**

 

Projecting future education costs can be an eye-opening experience for many young parents who struggle to balance the cost of living expenses and reduced income capacity while raising a young family. Many may feel that they will be better off in the future due to steadily increasing incomes or inheritances and will be able to 'catch up' later in life, well before the funds are needed for education.

 

How much is enough to save?

Work with your financial security advisor to calculate how much you can save by the time your children start paying for education. Is $25 a month enough? How about $125? Is it realistic to save over $250 a month while handling other debts and obligations?


 
If current tuition and expenses in 2014 are valued at $22,800**, and the program were approximately four years, the amount needed for education costs would be approximately $91,200. Assuming the savings started at year one, and continued to increase at the current rate of inflation, how much might education cost 5 years from now, 10 years from now, or 15 years from now?

Contact us to discuss realistic strategies to save for education.


w * Source: Statistics Canada University Tuition Fees 2012/2013

w ** Source: Carleton University http://graduate.carleton.ca/financial-assistance/costs-fees/

RESP Questions and Answers

What if I don't have enough disposable income to put into an RESP? Can I start later when we're in a better financial situation?

w Any amount of education savings offers a start for your child's future. And there's no limit to what can be contributed each year, up to a lifetime maximum of $50,000 for each beneficiary's RESP. (More than this draws a penalty.)

 

w Starting earlier rather than later can offset education costs, which in turn can reduce the amount of debt a new graduate could carry - a step-up for someone starting out in life. Plus, to help you save more, the federal government offers the Canada Education Savings Grant (CESG) - a grant of 20% on the first $2,500 contributed to an RESP each year for a total of $500, a nice top-up (lifetime limit $7,200)

 

w Depending on income, additional grants may be available - an extra 10 or 20 per cent on the first $500 of annual contributions for qualifying beneficiaries. Eligibility and percentage is based on net family income.

 

What are the tax benefits of investing in an RESP? 

Taxes are deferred on investment income:

w Money inside an RESP grows tax-free until it's withdrawn. Withdrawals are taxed in the child's hands, not yours. Since students generally have a much lower income, this "income splitting" technique should result in significant tax savings.

 

Can RESPs be used for more than college or university programs?

w Yes, they can be used for a wide variety of trade or business schools, apprenticeships and even certain part-time education if the program qualifies. Full-time foreign studies may also qualify. To discover what programs can be used with the RESP program, visit the government of Canada website: http://www.canlearn.ca/eng/main/designated/ldi.shtml.

 

If the beneficiary elects not to pursue post-secondary education, what happens to the grant money?

w Any Canada education savings grants (CESGs) must be returned to the government, though under certain conditions (see next question), the grant money may be used for a brother's or sister's education. The Canada Learning Bond (CLB) must be returned to the government - it cannot be used by another child. Provincial grants must also be returned.

 

What can I do with RESP money if the beneficiary decides not to take advantage of it after high school?  

There are five options:

1. Wait. RESP accounts can stay open for up to 35 years - he or she may change their plans.


2. Transfer it to another beneficiary. For individual plans, this can be anyone - but if it's not a sibling under age 21, the CESG must be repaid. For family plans, there must be a blood or adoptive relationship to the subscriber - and the CESG can be allocated to another beneficiary if the total does not exceed the maximum of $7,200 (excess grants must be repaid).


 
3. Roll contributions and growth into an RRSP, provided you have contribution room. Maximum rollover is $50,000 per contributor.


 
4. Withdraw contributions. The subscriber can do this any time on a tax-free basis, but must repay any grants on these contributions to the government.

 

5. Withdraw earnings and growth. You may also be entitled to withdraw earnings and growth on both contributions and grants (though the grants themselves must be repaid) if they meet certain conditions. Subscribers will qualify for this Accumulated Income Payment (AIP) if all current and previously named beneficiaries are 21 and not attending a post-secondary institution provided the RESP is at least 10 years old. An AIP is taxable at the subscriber's marginal tax rate plus a 20% penalty tax (an extra 12 per cent in Quebec).


Quadrus Investment Services Ltd. and design, Quadrus Group of Funds and Fusion are trademarks of

Quadrus Investment Services Ltd. used with permission.

 

Ron King, Investment Representative,

Quadrus Investment Services Ltd.

Insurance products, including segregated fund policies are offered through Specialty Wealth & Financial Inc., and Ron King offers mutual funds through Quadrus Investment Services Ltd.

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This newsletter contains general information only and is intended for informational and educational purposes provided to email newsletter clients of Ron King and Specialty Wealth & Financial. Some of the information and opinions contained in this newsletter are reprinted with permission from sources quoted. While information contained in this newsletter is believed to be reliable and accurate at the time of printing, Specialty Wealth & Financial does not guarantee, represent or warrant that the information contained in this newsletter is accurate, complete, reliable, verified or error-free. This newsletter should not be taken or relied upon as providing legal, accounting or tax advice.  You should obtain your own personal and independent professional advice, from your lawyer and/or accountant, to take into account your particular circumstances

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