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REGISTERED EDUCATION SAVINGS PLAN
Every parent dreams of their children becoming successful in their career and their life. Most parents place a higher priority on sending their children to college or universities for higher education.
Every year the cost of education is on the rise, so affording it may become a difficult task in the future. In the absence of a plan, the parents may be left with few options such as borrowing money, raising a mortgage, exhausting their retirement savings, or burdening their children with education loans.
However, careful planning and an investment strategy may help the family achieve their goals for their children.
R.E.S.P or the Registered Education Savings Plan is an effective tool that can take care of most of the higher education expenses.
What is a Registered Education Savings Plan? (R.E.S.P)
It is an investment account in which the Government matches the contribution with up to 20% grants and bonds. The money grows tax-sheltered, which is to be used for funding the higher education of a child. There is a lifetime maximum contribution limit of $50000.
The Government matches your contribution with:
R.E.S.P - How it works?
The sponsor of the plan, usually the child's parent or guardian, contributes to the R.E.S.P. The Government then matches 20% of that, up to a maximum contribution of $2500 each year. You can get $500 in FREE MONEY (CESG) every year if you contribute the maximum.
This Canadian Education Saving Grant (CESG), the Government money goes straight into the beneficiary's R.E.S.P. It may be invested as per your choice within the available investments.
Lower and Middle income families cab benefit from additional grant amounts. However, the $7,200 lifetime grant limit still applies.
Though it is suggested to make a regular contribution to an R.E.S.P, if you can't contribute the full $2,500 in any year to get the full Government grant, any unused grant room is carried forward and be used in future years. The only caveat is that in any one year, the maximum grant that can be claimed is $1,000.
Why Should You Open An R.E.S.P Account?
The cost of higher education is increasing every year, thus emphasizing the need for saving for their children. The tuition fee for a university program is about $22,000 a year, which may not include accommodation, meals or transportation costs. A four year program may cost anywhere between $ 80,000 to $90,000.
It's FREE MONEY as the Government matches your $25,00 in contribution with $500 in Grant and Bonds.
Your money grows tax-sheltered.
The money you contribute to an R.E.S.P can be withdrawn tax-free as Post-Secondary education payments. On the other hand, the portion of R.E.S.P that came from Government grants, as well as any capital gains and investment income, is withdrawn as Educational Assistance Payments (E.A.P's) and is taxable to your child. Since students have low incomes and an access to tuition education tax credits, they usually pay little or no tax.
Type of R.E.S.P's
This type of plan is ideal if you are not related to the child for whom you are saving. In this plan, only one beneficiary is named in the R.E.S.P, and the beneficiary does not have to be related to you.
You can open this type of R.E.S.P for yourself or another adult; however, the Canadian Education Savings Grant (CESG) and the Canada Learning Bond (CLB) can only be paid to eligible beneficiaries.
A family R.E.S.P is suitable if you have more than one child.
You can name one or more children to receive the money when it's time to pay for their post-secondary education. The children must be related to you, either by blood or adoption. They may be your children, stepchildren, grandchildren( including adopted grandchildren), brothers or sisters.
Under the Income Tax Act, a "blood relationship" is that of parent and child (or grandchild or great grandchild) or brother and sister. Nieces, nephews, aunts, uncles and cousins are not considered blood relatives. Also, you cannot be considered a blood relative of yourself.
The advantage of a family plan is that earnings can be shared among the children, and the Canada Education Savings Grant (CESG) may be used by any beneficiary named tin the R.E.S.P, to a maximum of $7,200. The additional Canada Education Savings Grant and the Canada Learning Bond can be paid only if all the plan's beneficiaries are siblings.
A group plan is for one child only, and the child does not have to be related to you.
If you can make regular payments throughout the R.E.S.P term, the group plan can be ideal for you. In this plan, your savings are combined with those of other people. The money is in a group account; the number of students of the same age who are in school that year, determines how much each child gets.
These plans are provided by Group Plan Dealers who usually invest the money in low-risk investments. Each group plan is different and has its own rules. It is always recommended to read the terms and conditions for the investments carefully.
Usually, you will be asked to commit to making regular payments into the plan over a specified period. Fee may apply if you stop these regular payments. Group plans are a good option if you prefer to have someone decide how to invest the money for you, and you are reasonably sure for whom you are saving will continue his/her education after high school.
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