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Get good marks for planning – Registered Education Savings Plans (RESPs)

April 9, 2015 Education

It’s never too early to start planning for your children’s education, even if they are still toddlers. It’s simply good financial planning. It’s good retirement planning as well by reducing the likelihood of parents having to dip into retirement savings or take out loans during that decade running up to retirement age when their children are starting to head off to college.

Enter the Registered Educational Savings Plan- RESP- a savings account allowing you to defer tax on savings  income for a child’s education. While there are non-registered educational saving strategies (such as family trusts and intrust-for-accounts), an RESP offers several benefits including:

  • tax-deferred growth on your investment contributions
  • Canada Education Savings Grant (CESG) available through the federal government
  • flexibility in education savings and planning

Making the most of your savings.

The secret to growing your savings is to start early and contribute as much as you can. Beginning in 2007, there was no longer a specific annual maximum contribution. There is, however, a lifetime limit that has been increased to $50,000 from $42,000 per child. Even though RESP contributions are not tax deductible like those of a Registered Retirement Savings Plan (RRSP), your contributions are tax-sheltered during the life of the RESP. When the funds are withdrawn  to pay for post-secondary education, the funds are taxable in the hands of the student – who is typically in a lower income tax bracket than the subscriber.

To promote saving for a child’s education and to give a boost to RESPs, the government introduced the Basic and Additional Canada Education Savings Grant. The Basic CESG, which is deposited directly into the RESP itself, is equal  to 20% of the annual contributions made to an RESP, to a maximum of $1,000 per year per child, depending on the availability of CESG carryforward. The CESG is not included in determining the lifetime $50,000 RESP contribution limit.

CESG’s are available up to and including the year in which a beneficiary turns 17, and are subject to a lifetime maximum of $7,200 per child. An additional amount of CESG is available to assist lower-income families. Qualifying net income is the same information that used to determine eligibility for the Canada Child Tax Benefit (now called Canada Child Benefit effective July 11, 2016). Unused additional CESG is not eligible for carry forward to future years.

All in the family or by individual.

RESP plans can be set up for single beneficiaries or families. Family plans can be more flexible. They have multiple beneficiaries and funds could be reallocated amongst siblings should one of them not attend college or university.

Individual plans for each child can potentially build up a greater pool of savings for several children who all intend to pursue a college or university education. Even if the child does not go to university, the RESP can be re-assigned to another beneficiary without penalty. Contributions are returned to the subscriber tax-free. The income earned within  the RESP is considered an Accumulated Income Payment (AIP) to the subscriber, which attracts regular income tax as well as additional tax of 20%.The estimates of your monthly and annual cash flow needs and your anticipated after-tax income from all sources, will give you an idea of how prepared you are to finance your retirement. If your estimates show more money going out than money coming into your retirement scenario, then the next step is to start closing that gap. Tax on the AIP can only be reduced if the original subscriber contributes this amount to his (or a spousal) RRSP. The RRSP contribution reduces both taxes on the AIP. However the CESG portion is returned to the government.

Flexibility with the self-directed RESP.

Investors who are comfortable with a self-directed RRSP may want to take the same approach with the RESP.

It offers several investment advantages. First and foremost you have greater control over the portfolio’s assets and your contribution schedule. There are little or no administration costs. There is little restriction on eligible investments making it similar in most respects to your self-directed RRSP. This means a knowledgeable investor can manage the account with greater control over its growth and safety, choosing a mix of securities – equities and fixed income than would be found in a managed pooled plan. With education costs rising faster than the current inflation rate in Canada, the need  for above-average real rates of return will be an important part of the RESP’s value to the student of tomorrow.

Canada Learning Bond.

The Canada Learning Bond (CLB) is available to every child born on or after January 1, 2004. Eligibility is linked to the National Child Benefit Supplement received with the Canada Child Benefit or Children’s Special Allowance. An initial $500 is provided when the beneficiary is first eligible; additional annual $100 payments are made for each eligible year up to the year the child turns 15 years, for a maximum lifetime total of $2,000. The CLB amount is paid into an RESP with the authorization of the primary caregiver and does not affect the lifetime RESP contribution  limit.

Members: Investment Industry Regulatory Organization of Canada (IIROC), Investment Funds Institute of Canada, Canadian Investor Protection Fund. Raymond James Ltd. (RJL) prepared this newsletter. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer or solicitation for the sale or purchase of securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its officers, directors, employees and families may from time to time invest in the securities in this newsletter. Securities offered through Raymond James Ltd., member Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. Produced in Canada. Reproduction without permission is permitted with due acknowledgment.