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The day your baby arrives in the world, the last thing on your mind is all of the underlying responsibilities that take place, aside from keeping them alive. I’ll never forget when the doctor came in just 24 hours after my daughter’s birth and told my husband and me that they’d discharge us shortly, mostly because the conversation was followed by being handed 30+ documents that we needed to fill out and sign.
Naming your kid, signing up for government benefits, issuing a social insurance number (SIN), what vaccinations she needs and when. To say it was overwhelming is likely the understatement of the century. Not to mention, after coming down off the painkillers, it’s highly likely that I made at least three mistakes on each piece of paperwork.
Before my daughter was born, I did make sure to write a checklist of essential tasks I’d need to accomplish the month or two after she arrived. I needed to add her to our online will, assign her as a beneficiary on all of my work documents, and of course, open a Registered Education Savings Plan (RESP).
That’s right. I was already thinking about my child’s education while still in the womb, and perhaps it’s good that you do, too.
An RESP is a savings account for your kid’s post-secondary education, should they choose to pursue college or university. As the child’s parent or relative, you can contribute to the account on their behalf as soon as they have a SIN.
An RESP is registered through the Canada Revenue Agency (CRA) and similarly has limits to your Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA). One significant difference, though, is that there are no annual limits for contributing to your RESP. Instead, the maximum lifetime contribution a beneficiary (your child) can receive is $50,000.
One of the great things about an RESP is that some accounts are eligible for government grants. Yay!
The available grants are:
And potentially any education savings programs in your province
If you receive any additional funding from these grants, please note that the extra contributions made by the government do not count towards your $50,000-lifetime limit. As long as the money you contribute towards your education fund stays in the account, it is not taxable, just like an RRSP.
Choosing a provider for your RESP is similar to selecting any financial institution for your money or investments. You must take time to do research and make yourself aware of any associated fees or contribution limits. Nearly every bank, credit union and investment company provides RESP options.
Before you choose your financial institution, you’ll need to know the different types of plans you can choose for your RESP. There are three options, including a family plan, an individual plan, or a group plan. To clear up the inevitable confusion this has now caused, here are the main differences between these plans:
Family plans are ideal for families with more than one kid. If you have a family plan, the contributions made to your RESP can be used for any related child you have (including your kid or your grandkids).
An individual plan is ideal for people who are not related to the beneficiary of the RESP. Keep in mind that if your best friend were to open an RESP for your kid, as well as yourself, the limit for the beneficiary is still $50,000.
Lastly, a group plan is an investment tool provided by a company rather than a financial institution. Multiple people can contribute to a group plan with regular payments and grants.
Your financial institution or provider should be able to help you choose the best option for you. But, to make sure, here are a few good questions to ask your chosen financial advisor before you make the final decision:
Investing using your RESP is a great way to help the contributions you make grow using the power of compounding. All you need to open an RESP is your child’s SIN number, your SIN number, and your child’s birth certificate. There is no cost to open an RESP.
An RESP can only be open for 35 years maximum, and can no longer accept contributions after 31 years. In other words, if your child isn’t sure if they’d like to attend post-secondary, they have until 35-years-old to make the call.
If your child turns 36 and suddenly says: “MOM! I told you! I’m not going to college,” there are a few options.
If you have another, younger child or relative who could use the money, you can transfer funds from one RESP to another.
You can transfer the money to an RRSP, give or take a couple of conditions. One, your RESP must be at least ten years old, and two, you must have enough contribution room in your RRSP for that tax year.
You are free to close the plan and receive your contributions back. In this situation, though, you’ll need to consider the conditions yet again. One, you will have first to return any of the money received via those government grants we talked about. And two, you’ll have to pay taxes on any investment earnings you gained through the RESP.
If you’ve read all of this information and all you can think about is the fact that
$50,000 is a lot of money, or;
$50,000 is not enough for a post-secondary education
I completely understand these concerns.
If you’re curious about what a good goal is, and want to have a better understanding of what you should save in total for your child’s future, a good rule of thumb is to take inflation into account. Currently, the average cost of a four-year university program in Canada is $25,852. Let’s look at an example.
If your child is one-years-old in 2020, and we use an average inflation rate of 2.5% per year, in 2038 and on their 18th birthday, the average cost of a four-year university program could be about $39,335. Although, that number doesn’t include housing, transportation or books.
Therefore, to cover tuition only, you’d need to save around $2,185 each year if you didn’t invest that money or receive any grants.
Investing alone can be a significant help to maximize your RESP earnings. Using a simple compound interest calculator, I found the following numbers:
“Your initial investment of $2,000.00 plus your yearly investment of $1,500.00 at an annualized interest rate of 5% will be worth $47,568.96 after 18 years when compounded monthly.”
Then, if you are to add in the CESG grant, for example, your annual contributions between $500 and $2,500 will be matched at the rate of 20%. The maximum CESG lifetime allowance is $7,200 per child.
I use Wealthsimple for my child’s RESP. I chose this platform because I already have investments, the fees are low, and my husband and I can make automatic contributions and monitor the account. One of my favourite parts about Wealthsimple is the ability to see how much money you’ll earn over the period you plan to save, which can help you adjust the numbers to reach that goal.
Wherever you choose to keep your child’s RESP, just remember to ask questions to ensure you aren’t paying fees you shouldn’t be, and that you trust the institution you choose. Do your best to invest the money in a way that suits your risk profile, and don’t forget to take advantage of any government grants that are available to you based on your annual income.
However much you choose to save for your child’s education is a personal choice, and there are no end-all, be-all numbers that make one parent better. Any savings is a fantastic investment for your child, whether in their college fund or to keep them healthy and fed throughout their lives.
Oh no, you missed the live webinar! But, good news: Mixed Up Money is pleased to share a resource for anyone planning for a future child or family.
Mixed Up Money is pleased to share a free resource for anyone looking to cut back on non-essential spending. My most-requested product is these monthly calendars to share on your Instagram story, use as a phone background, or print off to track your spending habits.