UNDERSTANDING RESPs

Question: Why is there so much promotion of registered education savings plans (RESPs) ?

Answer: An RESP can be a valuable tool to put money aside for your child's or grandchild's education. Virtually all full-time post-secondary education in Canada is eligible for funding from an RESP. Just how much money will you need? Surveys show the average annual expense for post-secondary education - including tuition, books, room and board - is between $10,000-$12,000 in today's dollars. This means a four-year university program would cost about $40,000-$48,000.

Here's an example of what this might mean in the future (assume your child will be going to university in 15 years; assume a modest inflation rate of three per cent): Based on the average annual cost for university education, you might be looking at a cost of between $61,000-$72,000. Although the cost of a child's education may seem daunting, time is on your side, if you start planning today.

As you may know, RESPs are a popular way to save for higher education - probably because they offer a terrific combination of tax savings and an annual government grant. Each year, RESPs rules allow you to contribute up to $4,000 per child (called the "beneficiary"). This means you can contribute up to a total of $42,000 per child.

The Canadian Education Savings Grant (CESG) makes this investment even more attractive. The federal government will contribute a grant equal to 20 per cent of the first $2,000 of your annual contribution. This means you could be eligible for a grant of up to $400 per beneficiary, per year. The monies invested will be in a mutual fund RESP.

RESPs offer two significant tax benefits which aren't available through regular savings. First, your RESP will grow tax-deferred. Because no dollars go towards paying taxes at this stage, all of the money remains in the plan where it can generate more growth. The result? Your RESP will increase in value more quickly than a non-registered plan.

Second, when it comes time to withdraw the income from the plan to pay for your child's education, the beneficiary's tax rate may be low. This is because growth in RESPs is taxed at the student's tax rate. Since most students have much lower incomes than their parents, this "income splitting" results in significant tax savings.

If your child decides not to go to college or university, you do have some options - your money is not gone. They are a little complicated to recap here but call if you have some questions.