By Peter Lewis
I noticed it, literally, the day after Halloween: Christmas music, gently wafting over the speakers in a large box store on the outskirts of town, where I had gone to buy a watch battery. But after quietly saying to myself “good heavens, how long till they start Christmas music the day after Labour Day?!”… it occurred to me that, as they do every year at this time, my children’s grandparents would be calling fairly soon to ask what they should be getting the kids for Christmas.
And, as we do every year in response, my wife and I will look at each other and shrug, and say “we’ll get back to you on that”.
But as I waited for the clerk to fetch the battery, I had a sudden brain wave. Instead of buying toys or clothes or electronic gadgets that the children will acknowledge and remember for all of thirty seconds on Christmas Day, the grandparents could take the money otherwise allotted for gifts, and put it instead into our kids’ registered education savings plans (RESPs)!
No, it’s not a very “visible” gift. But I can assure you it will have more value, more meaning, and a more positive outcome for each child than any doll, scarf or Xbox game ever will. It will help to provide a post-secondary education for any or all of our children who choose to go on past high school – which my wife and I hope is every one of them.
RESPs have been around for years, but it wasn’t until the Government of Canada introduced the Canada Education Savings Grant program in 1998 that their popularity soared. The CESG provides at least 20 cents in additional grant money for every dollar saved for a child’s education (on the first $2,500 saved each year) – and even more, depending on family income. The maximum grant over the lifetime of an RESP is $7,200.
In 2004, the federal government added the Canada Learning Bond to help lower-income families even more. If the child was born after December 31st, 2003 and the family receives the National Child Benefit supplement (NCBS – an extra supplement to the Canada Child Tax Benefit for lower income families), the Government of Canada will put $500 into the child’s RESP in the first year, and $100 more each following year that the family qualifies for the NCBS.
In the meantime, Quebec and Alberta have introduced their own programs which help parents save for their children’s post-secondary studies.
There are, essentially, two types of RESPs. Both provide the opportunity to put money away now, and pay no tax on it until the money is withdrawn later.
So-called “self-directed” plans can be established through banks, mutual fund companies and other financial institutions; with these plans, you the investor determine how the money will be invested, and you control the frequency of contributions into the plan.
The second type of RESP is the “group” plan. Here, you make consistent, planned contributions. Your funds are pooled with those of other contributors and managed by a not-for-profit foundation. If any contributors have to cancel their participation in the plan, they receive their initial contributions back (less fees), but the interest that accrued on their investment stays in the pool for the benefit of those remaining. Essentially, it’s a disciplined savings program.
When your children are ready to attend college or university (or approved skills training courses), the government grants and income earned in the plan starts coming out in the form of Education Assistance Payments. These are taxable, but at the child’s income tax rate, which in many cases means little if any tax is payable.
With university tuition and living expenses now in the $12,000-$15,000 per year range for many university students, it’s conceivable that a four-year degree could cost over $70,000 within the next 10-15 years. An RESP, started today and maturing in fifteen years may not cover all those costs, but it could go a long way toward making the post-secondary dream affordable. And when you and your children know that money is being dedicated to that purpose, it may help everyone focus on that goal just a little bit harder.
If you don’t have an RESP for your children – or grandchildren – consider talking to a financial advisor or sales representative from a group RESP company. For a list of the latter, visit respdac.sidetrail.com.
And even though it’s early for me to say… nonetheless, “Have a Merry Christmas!”
Peter Lewis is Chair of the Registered Education Savings Plan Dealers Association of Canada, and father of six children!