It requires a lot of financial support these days to keep students out of a lifetime of debt. The RESP is a good savings plan to consider when saving for your child’s future.
The cost of tuition for Canadian has sky rocketed over the past several years. Medicine, dentistry, pharmacy and law have the highest undergraduate tuition fees throughout Canada ranging from $10,000 – $18,000 per year. But masters of business administration programs were the most expensive around $40,000. But luckily the RESP is one saving program that can come close to covering the total costs of tuition. Here are some key points to think about for families seeking advice for education funding:
Benefits of Contribution: contributions to an RESP are made with after-tax dollars so there is no tax deduction allowed. Although the funds attract tax-deferred investment income which can be tax free if the student goes to school and withdraws their funds when there is little or no income. There is also no annual contribution limit with a lifetime maximum contribution of $50,000.
Benefits of periodic contributions: the RESP contribution attracts participation from the federal government by way of the Canada Education Savings Grant (CESG). This is 20% of each beneficiary’s annual contribution up to $2500 to a maximum of $500 per year. So it is actually better to contribute annually rather than in a lump sum to maximize the grant.
Maximizing the Benefits: the maximum lifetime CESG is $7200 and beneficiaries qualify for the grant until the end of the calendar year that they turn 17. Although in order to be eligible for this grant you must start saving in the RESP before the end of the calendar year in which the student turns 15.
Also lower income families can tap into the Canada Learning Bond (CLB). The government contributes the first $500 to the RESPY and pays the charge for opening the account of $25. Then the CLB will pay an additional $100 per year for up to 15 years and each year the family is qualifies to receive the National Child Benefit. A family RESP plan also allows you to name more than one beneficiary.
This RESP can help your child attend post-secondary school, and the CESG, CLB and the investment earnings which have accumulated on a tax-deferred basis along the way is withdrawn in the hands of the student as Education Assistance Payments (EAPs). These amounts must be reported in income but since students often have little to no income the EAPs are often tax free or have little tax cost.
The RESP is an excellent way to keep future scholars out of debt or help better manage the debt they have accumulated from all the excessive costs of post-secondary education.
- Thanks to the Knowledge Bureau for this information