Do you want to set your child up for Financial Success?

One of the most important aspects of your child’s financial success is the quality of education they receive. In order to ensure that you have enough to provide for your child’s education, RESPs are a wonderful tool to utilize.  

What is an RESP?

A Registered Education Savings Plan (RESP) is an account that parents can utilize to build a nest for their children’s post-graduate education. To encourage parents to contribute to an RESP, the federal government matches 20% of what has been contributed, up to a yearly maximum of $500. This means that you immediately get 20% additional buying power before you even start investing.

There is a maximum on how much that can be contributed to an RESP for a child. The lifetime maximum is $50,000per beneficiary. There is also a maximum of how much the federal government contributes as Canada Education Savings Grant (CESG), during the lifetime of the RESP. The lifetime maximum CESG that a child can receive is $7,200.

It is important to know that an RESP can be opened as soon as you get a Social Insurance Number for your child. Assuming a 5% rate of return, you would need the following contributions to meet a goal of $10,000 a year for a 4-year degree.

· Contributing from age 1 till 17 years -$138/month

· Contributing from age 10 till 17 years - $344/month

· Contributing from age 15 till 17 years -$759/month

This shows us the importance of starting to contribute to an RESP as soon as possible.  

Scenario: I have $50,000to contribute to an RESP now, should I contribute now and forego the grant money? Or should I maximize the grant money?

The answer to this question will depend on your situation. For the purpose of this blog, let’s assume a 5% rate of return, and that your child has just turned 5 years old. A $50,000contribution and a $500 CESG will grow to approximately $90,000 by the time the child turns 17 years old. Alternatively, if $50,000 is invested through a TFSA(assuming the contribution room is available), and $2,500 is withdrawn each year to contribute to an RESP, the value of the RESP when the child turns 17 is approximately $97,750.

What if my child does not utilize all the funds?

If the child does not use the funds in an RESP, the money can still be withdrawn. A person would lose all the CESG, since it was meant for education purposes only. The parent can transfer up to$50,000 from the RESP to their personal RRSP, if they have the contribution room available. Any amount that does not get transferred to the RRSP, will be taxed in the name of the parent, with a 20% tax penalty. The penalty is because you have been earning investment income in a tax-deferred manner when it stayed inside an RESP.

- Jai Gandhi, Licensed Assistant

Jai Gandhi is a Licensed Assistant at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Endeavour Wealth Management provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Jai Gandhi who is a Licensed Assistant for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.