RESP's

September marks back-to-school time for children and, most times, a welcome relief for parents from a summer full of activities such as trips to the PNE, Seawall, Whistler, Kelowna, or however else they choose to entertain their little ones to avoid a tiny voice whining “I’m bored!”

Here in B.C., an estimated 86.5 per cent of students between kindergarten and grade 12 attend one of the province’s fully funded public schools. Financially, for parents, this is a boon…basic education is provided, and your child is given a platform on which to launch into the world. But what about our little scholars who are headed into post-secondary education, with costs often close to a six-digit number? Without a proper plan to fund this, financial woes could halt an otherwise bright student from achieving their potential.

There are several ways to fund your child’s education, from lines of credit against homes to government loans to savings. One very effective way is a Registered Education Savings Plan, or an RESP, around which there is a lot of misinformation and confusion.

At its very basic state, an RESP is a savings plan designed by the government to aid in the further education of your child. A baby with a social insurance number can have one opened (generally) by his or her parents/grandparents etc., who would be called the subscriber. Within certain limitations, contributions are made into the RESP, which grow on a tax-free basis, much like an RRSP. The funds contributed, in addition to any grants received, will be invested; again, much like an RRSP.

If the tax sheltering as a benefit isn’t incentive enough, the government provides a grant called the Canada Education Savings Grant, which is 20 per cent of your contribution, up to a maximum of $1000/year. Depending on the income of the primary caregiver, an Additional Canada Education Savings Grant can be provided. At the time of print, the lifetime contribution limit to an RESP is $50,000. The contributions, coupled with the CESG and possibly the Additional CESG, invested wisely, can provide a nice lump sum to start the post-secondary educational career. The gift of money for education is invaluable and can help your bright student start their career with limited amounts of debt.

The beneficiary, through the subscriber, would apply for an Educational Assistance Payment (EAP), which is a portion of the RESP taxed in the hands of the beneficiary (student). As the student’s income is likely to be very low, the tax payable on this amount would be negligible.

The qualifying educational programs for use of an RESP have opened up significantly in recent years and are not limited to formal university education. Trade schools, colleges, certain beauty schools and performing arts institutions, can all be designated as educational institutions under an RESP. A full list is available online.

If the beneficiary of the RESP decides not to continue their education after high school, the subscriber has several options which include naming a new beneficiary, transferring the funds to their own RRSP, or to an RDSP.

A common application I’ve seen in our practice is cash contributions from extended family on occasions such as birthdays and Christmas. Those cash contributions, while seemingly minimal, are magnified by the government grant, and over time, can exponentially grow. Grandma’s $100 cash gift at your fifth birthday party may be able to pay for a $500 textbook in university, when deposited into an RESP! Such is the power of compounding.

With the costs of education rising every year, the sooner a child has an RESP started for them, the better. Before you commit to any sort of a plan, consider sitting down with a qualified financial advisor to help you make a well-suited decision. To a good financial future!

Bharathi Sandhu is a Sr. Business Development Specialist with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The view and opinions contained in the article are those of the author, not Raymond James Ltd. This article provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd. endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same privacy policy which Raymond James Ltd adheres to. Raymond James Ltd. member of Canadian Investor Protection Fund.