Back to School – Retirement Education Savings Plans (RESP)
With September looming just around the corner most parents have begun back to school shopping for their children in search of the trendiest sneakers and latest tech gadgets. August is also a great time to discuss the longer term investment of a Registered Education Savings Plan (RESP). A RESP is a tax-deferred investment plan that helps you save for a child’s post secondary education. Through various government grants and tax deferred earnings you can enjoy healthy financial growth to your plan for up to 35 years or until your child enrolls in post-secondary school.
We have listed below some statistics relating to Canadians saving for post-secondary education from a 2014 TD Canada Trust Survey.
$150,000: The expected average cost of an undergraduate degree while living away from home in 2031 – just 16 years from now.
29 percent: The percentage of Canadian parents with children under the age of 18 who, despite rising costs, are not saving for their child’s education.
50 percent: The percentage of parents who cited costs associated with raising their children – including daycare, vacations, sports and extracurricular activities – as impacting saving for post-secondary education.
In order for parents to maximize their RESP savings, it is important to start saving early and regularly. The sooner parents start, the sooner their RESP can start growing; even a small amount saved each year can make a significant impact by the time a child is 18.
There is no maximum yearly contribution limit for an RESP, however there is a lifetime maximum contribution limit of $50,000 for any one beneficiary. In order for parents to receive the maximum grants per child, they should contribute at least $2,500 in contributions per year to receive the $500 yearly maximum available through the Canada Education Savings Grant (CESG) program.
What if parents realize that their children aren’t cut out for university? Can they keep their RESPs? How does that work in this case?
If your child does not attend post-secondary school, you could withdraw the money you contributed to the RESP for non-educational purposes instead. This can be done by making what is known as a ‘non-educational capital withdrawal’. The amount of the Canada Education Savings Grant (CESG) and any provincial grants (if applicable) that you received on the amount you withdraw will be sent back to the government. Alternatively, if the family has more than one child and has a Family RESP Plan, the full proceeds may be used by the child(ren) who pursue post-secondary education.
What advice would you give young parents?
Here are four tips to help parents save for their child’s post-secondary education and ensure other financial priorities, such as saving for retirement, also stay on track.
1) Save early, regularly: Contributing small amounts regularly to an RESP allows your money to grow over time.
2) Maximize the Universal Child Care Benefit: As part of its annual budget, the federal government is expanding the Universal Child Care Benefit. To maximize this benefit, parents can contribute this additional money to their child’s RESP to help build future savings.
3) Take advantage of eligible Government Grants: Take advantage of any government grants you may be eligible for. The Canada Education Savings Grant (CESG) will give you 20 percent on the first $2,500 you contribute to an RESP each year, up to a lifetime maximum of $7,200.
4) Build a plan: Once you know where your money will come from, work with a financial advisor to create a long-term financial strategy that works with your family’s goals. Check in regularly on your plan to monitor and assess your developments.
Once a dependent child reaches the age of 21 (or 22 depending on your insurance company), insurance carriers will terminate them as an eligible dependent under your Health and/or Dental benefits. Coverage can be continue if they are enrolled in an accredited educational institution, college or university as a student, on a full-time basis.
One thing to remember is that the enrollment & eligibility of students varies depending on your insurance carrier. Some require paperwork, which takes time to process, so make sure to contact your insurer, or Silverberg Account Manager, for the process specific to your carrier before classes resume.
For the full definition of an eligible dependent child, please refer to your insurance policy or employee booklet.