Engineer, teacher, carpenter… Whatever career their children choose, parents want to give them the opportunity to realize their dreams. College, University and Trade schools can be expensive, regardless of the province that you reside in, the average cost for 1 year of undergraduate studies can easily cost a few thousand dollars, add in room & board and the bill only gets bigger.
The RESP, or Registered Education Savings Plan, is a great way to ensure your child has the necessary funds when the time comes to pursue a post-secondary education. Plus, thanks to government assistance, the deposited amounts grow.
As soon as the child is born, the subscriber- the person who opens the RESP – can name a beneficiary who needs to have a social insurance number and be a Canadian resident. The RESP can stay open for up to 36 years.
There are two types of RESPs, in an individual plan, a family member (parent, grandparent, aunt, uncle, brother or sister) or a friend of the family can contribute. In the case of a family plan, on the other hand, the beneficiary must be connected to the subscriber by blood or adoption.
The RESP’s main attraction is that it allows you to benefit from various Federal and Provincial grants that can boost your contributions between 20% to 30% when you include some provincial incentives. When maximized these grants can add several thousand dollars to the value of the RESP.
Here are a few of them:
1- The Canadian Education Savings Grant (CESG)
The CESG represents 20 percent of the first $2,500 in contributions a year, up to $500 yearly, per child. The total contribution amount from the Canadian government is capped at $7,200 per child. The grants are available until the end of the calendar year in which the child turns 17. The cumulative contribution amount per child is set at $50,000.
2- Québec Education Savings Incentive (QESI)
With the QESI, the Quebec government contributes an amount equal to 10 percent of contributions made, up to a yearly maximum of $250 per child. The total cumulative amount from the Quebec government is fixed at $3,600 per child.
3- Canada Learning Bond (CLB)
Low-income families can also receive the CLB. This early savings incentive for children’s education can be up to $2,000.
Opening a RESP through a direct broker such as National Bank Direct Brokerage and managing the account as a self-directed investor, the returns earned on the contributions & grants will vary according to several factors linked to the markets and investment type chosen. Eligible investments are the same as for an RRSP, but your contributions to the RESP are not tax deductible. However, the capital remains accessible at all times, and both the capital and the investment income will grow tax-free as long as they remain in the plan.
Keep in mind that your investment strategy must take into account three main factors:
- your investor profile,
- the child’s age
- the number of years remaining before the start of the beneficiary’s post-secondary education.
During the first years of the plan, you should focus on investments that provide good long-term growth potential. In subsequent years, you should increasingly aim to protect the accumulated capital, as the time approaches to draw on the savings.
Finally, during the last years of the plan, you may want to consider adopting an investment strategy that preserves your capital and accumulated gains while generating sufficient cash for the withdrawals that you intend to make on behalf of the beneficiary.
Unlike contributing into a RRSP where the funds will be needed many decades down the road, the RESP is a little more time sensitive in terms of being able to fully take advantage of the government grants before the child reaches 17 years of age. It is important to start investing as soon as possible in order to benefit as much as possible from the grants and compound returns.
Thanks to the RESP, parents ensure that they will be able to pay for
their children’s education. Give your children an incredible gift: the
means to achieve their dreams!
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