Summer breezes by in Manitoba. Before you know it, fall is around the corner, and with it comes the start of a new school semester.
That might have you thinking about how you’ll afford school for your child. Have you considered opening an RESP to help cover their education costs?
Let’s go over the main reasons why you should open an RESP!
You can take advantage of government grants to help fund your child’s education. But how much money does the government contribute to an RESP?
It depends on which program you’re using, which includes:
Keep in mind that money from these grants must be used for education expenses. Otherwise, the grant money will need to be returned to the government.
You may be wondering: Are RESP contributions tax deductible? Unfortunately, no – RESP contributions don’t reduce your taxable income the way RRSP contributions do. You make contributions with after-tax dollars.
However, RESPs have other tax benefits. The gains from investments you hold within the account grow tax-free until withdrawn.
And that brings us to the next reason why RESPs are so advantageous:
In Canada, the amount of tax you pay is based on the income you earn. If you have a high income, you end up paying more in taxes.
But even though you make contributions to your child’s RESP, the money will be taxed at their tax rate upon withdrawal.
Since students tend to have a much lower income than their parents, this means that less money will go to taxes.
Check out our other blog to learn more about how RESP withdrawals work.
RESP contributions aren’t just limited to a child’s guardian – friends and family can help too!
RESPs have a lifetime limit of $50,000. Keep in mind that the maximum contribution limit remains the same no matter how many people contribute, so you’ll need to coordinate this with friends and family.
Overcontributions are penalized, so ensure anyone else contributing to the account is aware of this limit.
Not sure how much tuition will cost? Here’s a starting point: The Education Cost Calculator can help estimate how much it may cost to support your child through school.
RESPs are not an investment. They’re an account you hold investments in.
By investing your child’s RESP, not only are you saving for their future, but you’re taking advantage of compound interest to stretch those savings even further.
You can hold qualified investments in your RESP. That includes GICs, bonds, mutual funds, and ETFs. We recommend meeting with a Cambrian Advisor to find investments that suit your risk tolerance – book a meeting today!
One reason many parents are hesitant to open an RESP? You never know what the future holds.
What if by the time your child reaches age, they decide not to continue their education? Then, what happens to their RESP if it’s not used?
Note that your child doesn’t need to use the funds straight out of high school. They have time - You can keep the account open until the 35th year after the plan was started.
There are other options, too. You can:
Keep in mind that any funds from the CLB or CESG that are not used towards education costs will need to be returned to the government.
Don’t have enough to contribute this year? Good news: Your unused contribution room carries forward.
That means that even if you can’t contribute enough to take full advantage of the CESG match, you can make up for it in later years.
But you can’t catch up all at once. Each year, you can only use one previous year’s worth of contribution room.
That’s why the key to a robust RESP is opening it early into your child’s life and aiming to make contributions each year.
An RESP can remove some of the financial barriers to your child’s education and helps them get started on their career path. And we can help you get there.
From opening the account, to choosing investments and managing regular contributions, we can help you sort out everything you need to fund your child’s education.
Contact us today!
We would be happy to discuss your unique situation with you.
Our goal is to make complex topics like this one, simple.
It takes less than 5 minutes to make an appointment or to apply online. It is up to you how you want to meet your advisor - you will have the option to meet your advisor:
