Well, it’s that time of year again. University classes started in Halifax today, and (some) students are excited to be back – those who aren’t stressing about how they or their family will pay for yet another year of education.
A good education is a goal most parents have for their children. But the rising cost of post-secondary education has many parents concerned about whether they will be able to afford to send their children to college or university. To reduce strain on the family budget, and reduce reliance on student loans, it is wise to plan ahead and create a specific education savings fund.
Registered Education Savings Plans (RESPs) can be an effective way to save because they offer tax benefits and allow you to take advantage of federal government grants. The money earned in an RESP isn’t taxed until it is withdrawn. You can open an RESP for a child, yourself or another adult. This person is called your “beneficiary”. For more information about the tax consequences of RESPs, visit the Canada Revenue Agency website.
Different types of plans are available at banks, credit unions, mutual fund companies, investment dealers or scholarship plan dealers. Before you invest, be sure you understand all your options. Each plan type has its own rules and requirements – be sure to read the fine print. You may have to pay sales fees when you open the plan, plus other costs as long as you hold the plan.
Also, be sure you are aware of the costs of cancelling a plan. For group scholarship plans, you can cancel the plan at no cost within 60 days of signing the application, but it will cost you if you wait longer. For other types of plans, this time frame may depend on the type of investment you bought.
Most plans let you decide when and how much to contribute, up to the annual and lifetime limits. Other plans require you to make contributions according to a set schedule. In this case, if you miss a payment, your plan may be cancelled and you could lose your earnings. You will receive your contributions back, less any fees.
Federal grants can help you save even more. The Canadian government will match contributions to a child’s RESP (adults are not eligible) under the following grant programs:
- The basic Canada Education Savings Grant (CESG) will top up your annual contribution by 20%, up to a maximum of $500 each year for each beneficiary. The lifetime limit for the grant is generally $7,200. Additional CESG grants may be available, depending on your income.
- The Canada Learning Bond (CLB) provides an additional grant of up to $2,000 per child to help families with a modest income. Children must be born after December 31, 2003 to qualify.
For more information about federal education savings grants, visit www.canlearn.ca.
Once your beneficiary is enrolled in a qualifying educational program, they can start receiving payments from the plan. These payments are taxable in the student’s hands. Since most students have little or no other income, they will likely pay little or no tax. Note that some plans do not pay out earnings until a student starts the second year of a program.
If your beneficiary does not go on to education after high school, you have a few options. Your plan may allow you to choose another beneficiary. If not, you receive your contributions back, less any fees. In most cases you will receive your earnings. Some plans may keep these earnings and share them with the remaining members. In some cases, you can transfer the earnings to your RRSP. You may choose to withdraw the earnings in cash, but you’ll have to pay tax on them. You have to return any grants to the government, unless you have a family RESP.
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