Investing in a family RESP
As students navigate the new world of pandemic schooling, it’s hard to imagine what post-secondary school education will be like in the next decade. But it’s safe to assume the cost will continue to rise.
Between 1995 and 2015, the average cost of one-year of undergraduate university tuition nearly tripled to $6,191 from $2,333, according to Statistics Canada.
A more recent survey from StatsCan pegs the current tuition cost of a four-year university degree at $27,000. If the trend continues, that degree will cost $81,000 in 20 years.
The costs can be daunting for young parents faced with the burden of paying for a child’s education, especially if it requires living away from home. Those who start saving early can help ease that burden by investing in a federal government program called a registered education savings plan (RESP).
The RESP matches the annual contributions of a parent by 20 per cent up to $500, to a lifetime maximum of $7,200 per child. To maximize the full government grant, parents needs to contribute an average of $2,500 each year. Unfortunately for struggling parents, the maximum grant amount has not been increased to reflect the rising cost of education.
Unlike registered retirement savings plans (RRSPs), which have decades to grow, RESPs only have up to an 18-year time horizon. That means the money in the plan needs to be invested for a shorter period of time, to be withdrawn over a short period of time.
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Since the funds need to be invested in the broader markets to grow, there are risks when investing in an RESP. The money can be invested in just about anything – stocks, bonds, guaranteed investment certificates (GICs), mutual funds, exchange traded funds – just like investments in a RRSP or tax-free savings account (TFSA).
However, there are investment products tailored to RESPs, which a qualified advisor should be able to recommend. Most financial institutions including banks, credit unions and mutual fund companies provide RESPs. Scholarship plan dealers – companies that only sell RESPs – offer individual, family and group plans.
The contributions and grants grow tax-free while in an RESP, but unlike an RRSP, they can’t be deducted against a parent’s income. Instead, the RESP is taxed when withdrawn in the hands of the low-income student, who is typically taxed at a lower marginal rate.
If a child decides not to continue after high school, or if too much money is accumulated, tax must be paid on the money earned in the plan as interest. This money is called "accumulated income." It will be taxed at the parent’s regular income tax level, plus an additional 20 per cent. The money that the parent puts into the RESP is returned.
The grant money that comes with the RESP can be shared with a brother or sister if they have room available – otherwise, the grant must be returned to the Canadian government.
There is a lifetime limit of $50,000 for each child.
To get a better idea of how much an RESP needs to grow to keep pace with the rising cost of a post-secondary school education, the Ontario Securities Commission provides two online calculators on a website called getsmarteraboutmoney.ca.
The Education Cost Calculator estimates the cost for attending a specific college or university program as well as typical food, residence and other living expenses.
The RESP savings calculator estimates whether your planned savings will be enough to help meet those costs.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email email@example.com.