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Financial Planning > Education

Education Planning

Overview

Children are our hope for the future. We all want to make sure that they have the best possible tools to be able to success in their personal and professional lives.

Giving your children access to a post secondary education is something most parents hope to be able to do. However, with all the budget cuts being made in the education sector by various levels of government, the ever-increasing costs of a higher education are inevitable.

Thankfully, there are options available to assist you with this important financial challenge.

Concepts

Keeping Pace

Given the increase in tuition fees, a simple savings account may not be sufficient to accumulate enough funding to keep pace with school and college costs. Today, a University Degree is becoming a minimum requirement when seeking employment. As university costs are increasing, some planning and preparation may be required to help your family members achieve this important milestone. Projections indicate that in 2021, it will cost more than $85,000 for a four-year university program for a student living away from home. RESP’s and Scholarship Funds can help.

What is an RESP?

A Registered Education Savings Plan, commonly referred to as an RESP, is the best financial vehicle around to help you save for a child’s post-secondary education. Just like an RRSP, the federal government allows you to accumulate investment income on a tax-sheltered basis until the funds are withdrawn from the plan. In short, RESP’s are to education what RRSP’s are to retirement.

RESP contribution limits

You can contribute to an RESP at your own pace, with the possibility of making contributions at any time, in lump-sum amounts ($100 minimum) or through regular payments of as little as $10 per month. There is no required minimum contribution. To take advantage of the preferred tax treatment provided by RESP’s, the federal government has set an annual contribution limit of $4,000 per beneficiary, up to a lifetime limit of $42,000. Contributions can be made to the plan for a maximum period of 21 years from the effective date of the plan and RESP must be fully liquidated no later than 25 years after it is set up.

Canada Education Savings Grant

The federal government created the Canada Education Savings Grant (CESG) program in 1998 to encourage parents to invest in their children’s post secondary education. The CESG provides an extra 20% in addition to the annual contributions paid into the plan by the subscriber, up to $400 per year, per beneficiary. There is a lifetime limit of $7,200 per beneficiary. The CESG accumulates in the RESP on a tax sheltered basis and becomes part of the Educational Assistance Payments made to the beneficiary when he/she goes on to pursue post secondary studies. Furthermore, the CESG has no impact on the contribution limit.

Sample Case


You want to invest in your two year olds post secondary education. With the additional 20% in CESG’s generated on annual RESP contribution of $2,000 per year for sixteen years, and the growth of tax sheltered investments, you will accumulate a total of $65,300 in your RESP by the time your child turns 18. The same amount invested in a non-registered plan (no CESG) is $41,500, considering a 50% taxation rate (based on a 6% annual compound rate of return).

You may also withdraw the capital portion of the funds contained in your plan without having to pay taxes. However, investment earning generated by contributions and CESG’s can be transferred into your RRSP of that of your spouse (tax free), as long as you have unused RRSP contribution room, you are a Canadian resident, the RESP has been in existence for over 10 years and all plan beneficiaries are over age 21 and not eligible to receive EAPs.

The maximum amount in investment income that can be transferred into an RRSP is $50,000.

RESP investment earnings can also be donated to an accredited education institute named by the subscriber.

Tools

• Savings Plans
• RESP
• Scholarship Plans

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