Having a child with your significant other can be the most joyous experience that you can possibly have. It’s also no doubt that parents always want to have what’s best for their child. One such aspect is the notion of getting the best education possible.
In today’s competitive environment where jobs are scarce, education, to some, has become the must thing to have for success. It’s to no surprise then, that post secondary education has become a thriving industry. With tuition growing at a faster rate than inflation and salaries, it puts students that are graduating in a difficult situation. Not only are students graduating with a lot more debt, but they are inundated with the expectation that they must achieve greatness too.
This is why it’s important for parents to start planning early for their child’s education so that she does not become saddled with crippling student debt that can make it extremely tough for her to “take off”.
Registered Education Savings Plan
The Registered Education Savings Plan, better known as the RESP account, has actually been in existence in Canada for many decades. In fact it goes back to the 1970’s when the account was first introduced for the purposes of saving for education. The RESP account didn’t really get any traction until more recently when the government started giving matching grants.
Exactly like the RRSP account, the RESP account lets you invest tax free within the account in order to save for future educational use. The only difference is that you won’t receive a tax rebate for contributing to an RESP. So this means you are using after tax dollars to invest for an education.
Since growth in the RESP account is completely tax free, a lifetime limit was setup such that the maximum amount that one can invest in an RESP is $50,000 per beneficiary.
Canadian Educational Savings Grant
What really made RESPs popular was the advent of the Canadian Education Savings Grant. Introduced by the Federal Liberal government in 1998, the CESG will match 20% of any contribution made into an RESP up to a total amount of $500 per year. This is essentially free money that the federal government is giving to encourage parents to save for their child’s education.
The free money doesn’t flow forever, however, as there is a maximum lifetime grant of $7200 for each beneficiary. Regardless, the fact that the government is willing to match 20% of any contribution makes it a no brainer to actually use an RESP and save for a child’s education.
Long Term Investing
Just like an RRSP or a TFSA, the RESP is a vehicle that can be used for investing. Despite being called a “savings account” you should not make an RESP hold cash or GICs. Since the beneficiary of the RESP won’t be needing the funds until she is 17 or 18 years of age, this makes the RSEP account the perfect candidate to use for a balance investment portfolio where both stocks and bonds are used.
I’ve already mentioned before that during any 15 year rolling period, the stock market has never had a negative return. This means that an RESP that is created early enough will not only benefit from the 20% CESG top up, but from a growing stock market. There should be no reason why you can’t be aggressive with your RESP investments at the beginning, when the child is young, before tapering off to more conservative investments closer to years before withdrawals are made.
It’s hard to really know if post secondary education is the something your child will attend, but it doesn’t hurt to start planning. The fact that money can grow tax free in an RESP is a bonus. The fact that the government gives you an extra 20% on your contribution is another bonus. These facts alone should be enough to convince you to start an RESP as early as possible.
Of course there are many other rules that apply. You don’t just get free money without some strings attached to it. Over the next following weeks I’ll be following up on just how to manage an RESP, what the pitfalls are and what special rules actually apply when taking money out. Stay tuned.