You don’t have to be Kate Gosselin, an unemployed reality television star and single mom with a brood of eight kids, to be stressed about the costs of paying for your kids’ post-secondary education. Most parents are concerned (and confused!) about how to set aside money in a Registered Education Savings Plan. Enter Golden Girl Finance expert Rhonda Sherwood, a Wealth Advisor at ScotiaMcLeod in Vancouver, to help sort through the RESP rulebook and provide savvy ‘school-savings’ tips to get started!
1) Sign up the aunties
Have you always wanted to be an extravagant Auntie Mame? Are you a doting godmother or a grandmother extraordinaire? You can set up an individual RESP for other people’s kids (OPK) - all you need is the child’s social insurance number. You decide how to invest the funds and if the kid decides not to go to school, the money you’ve contributed is still yours and can be moved into your RRSP.
2) Per kid, not per plan
Your kid may not have Julia Roberts in the family (lucky Sarah Lawrence College student Emma Roberts) but if she has a generous relly or family friend contributing to her college funds, make sure you know how much is being invested each year. Within an RESP, the annual government credits and contribution maximums apply on a “per kid” basis, not on a “per plan” basis.
3) Know the limits
You (and any other benefactors) can contribute a lifetime maximum of $50,000 towards a child’s education within an RESP. The Canada Education Savings Grant (CESG) will match your funds by 20% to an annual maximum of $500 per year, up to a lifetime maximum of $7,200. Remember again, this is per kid, not per plan.
4) Types of plans
An individual beneficiary plan is an RESP for the use of only one child. The subscriber (person who sets up the plan) can be any adult, not necessarily related. A family beneficiary plan can only be opened by a “blood relative” (related through birth or adoption.) The family plan is more flexible with multiple kids involved – funds can be applied to each sibling’s tuition as needed.
5) Don’t use it - don’t lose it
Suppose you’ve diligently saved for your kids’ education through RESPs and then they all run off to Europe or Hollywood, forsaking post-secondary education. Well, you’ve done your best. The government contributions will have to be returned, but the funds you’ve saved can be redirected to your RRSP (if you have contribution room) – so at least your retirement nest egg will get a boost.
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6) Invest early, invest often
Many couples think about RESPs when a child is born, but they can be opened at any point – you can even open one for yourself if you have plans to go back to school. Government grants such as the CESG however, are only applicable for those up to age 17. In order to make the most of compound interest, start the fund as early as possible, even if it means only contributing as little as $25 or $50 a month.
7) Get the free money
In addition to the CESG, there are a range of Canadian grants available depending on your eligibility. Check into the Canada Learning Bond (CLB), the Alberta Centennial Education Savings Plan (ACES), the Quebec Education Savings Incentive (QESI) and the Universal Child Care Benefit (UCCB). Ask an advisor to help you find any other grants you may qualify for.
8) Tax shelter yes; tax refund no
RESPs provide tax-sheltered savings, so that any dividends or interest you earn will not be taxable while you’re saving. Unlike an RRSP however, your annual contributions are not tax-deductible. If you close the fund prematurely, any dividends and interest will become taxable, along with a penalty fee of 20% on those earnings – likely wiping out any gains you may have made.
9) Using the money
When it’s time to go to school, the student will choose which portion of money to withdraw from the RESP. The money you’ve saved is called Post-Secondary Education (PSE) contributions. The portion that comes from government grants is called Educational Assistance Payments (EAP). The latter is taxable in the hands of the student, the former is not. The trick is to use up the EAP first, since any unused EAP will have to be returned. With the student in a low tax bracket, the effect should be negligible.
10) Statute of limitations
An RESP can remain open for 35 years – plenty of time for that kid of yours to take a ‘gap year’ or figure themselves out before embarking on a four-year program. If, after 35 years, university just ain’t gonna happen and there is no other sibling to whom you can transfer the funds, the RESP must be closed. The EAP will be returned and the earnings taxed. Or – use the funds yourself and go back to school!
RESPs are pretty standard since they are such highly regulated plans. Therefore, you won’t gain much from shopping around. Choose an institution where you have a relationship, bring in a budget of what you can spend and ask an advisor to help you to choose investments. Hopefully, your prodigy will go on to make you proud!