The Gift of Education
August 21st, 2010
As our older daughter is expecting a baby (our first grandchild!) in October, my wife and I have been thinking about an appropriate gift. After our suggestion of a year’s supply of diapers was turned down, it was agreed that we would open a Registered Education Savings Plan (RESP) in the baby’s name. The other grandparents will be the jolly ones who give toys and clothes! As a financial planner, it was assumed that I would know everything about opening an RESP. I turned for help to an excellent Government of Canada web site, www.Canlearn.ca.
This site has everything you need to know to make informed decisions about setting up an RESP.
The initial checklist contains three items:
- Make sure the baby has a Social Insurance Number
- Find a provider that meets your needs
- Decide if you want an individual, family, or group plan.
For people in our position with one or potentially more grandchildren, the family plan seems to be the answer. This is equally true for the child’s parents. An individual plan would be more suitable in a one-off situation where the beneficiary does not even have to be related to you. In a group plan your savings are combined with those of other people.
The advantages of opening an RESP are clear. Your contributions grow on a tax-free basis –much like a Tax Free Savings Account– and the investment approach is up to you. RESP contributions also attract a Canada Education Savings Grant (CESG) of 20% of the contributions made in a year (up to a maximum of $2,500). Contributions to a family plan are flexible, and subject to a lifetime maximum per child of $50,000. When the payout to the beneficiary takes place, the portion which represents investment income and the CESGs is taxable. But at that time the beneficiary’s tax rate is probably very low.
Students can start receiving money from the RESP as soon as they are enrolled in a qualified post-secondary education program. These include apprenticeships and programs offered by a trade school, CEGEP (in Quebec), college or university. The programs can be full or part-time, providing they meet the criteria established.
The major concern about RESPs has always been the possibility that the child in question does not continue education after high school. In the first place, there is plenty of opportunity to use the money, as the RESP can remain open for up to 36 years. Secondly, if the child has a brother or sister, the money can be transferred into their RESP. If there really is no other choice, the money can be withdrawn, with the CESGs being returned to the Government.
As a practical point, there is some strategy around the timing of RESP contributions. For example, if you make the full $50,000 contribution in the first year, it will only attract one CESG of $500. There is no carry-forward. The maximum lifetime grant available per child is $7,200 and is available for children aged up to 17. So an annual contribution of $2,000 would maximise the grant. The optimum strategy will depend on whether you are prepared to give up some grant in order to secure a longer period of tax-sheltered investment income.
In summary, contributing to an RESP makes you feel good and is tax-effective. But there is a small risk that the money will never get to the intended recipient. If this is a real concern to you, then the alternative is the traditional approach of taking out a life insurance policy.
Finally, if you really want to make a splash, go to www.oneshare.com. There you can buy a single share of your favourite US stock in the name of the child and have the share certificate framed. Every time they receive a dividend payment, they will think of you!
Patrick Longhurst
Tags: education, finance, RESP
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