If there’s one thing every new parent needs to do to ensure they can adequately save for their child’s education, it’s opening up a Registered Education Savings Plan (RESP). The RESP is the most important vehicle for your child’s future, and an early start means you won’t feel the pinch 17 or 18 years down the road.
What is an RESP?
The RESP was introduced by the Government of Canada to help Canadians save for education. Under the Canada Education Savings Grant (CESG), anyone can contribute money to help fund a child’s post-secondary education. Regardless of family income, the government will match 20 per cent of contributions up to a maximum of $500 annually and lifetime limit of $7,200. Visit the CRA site for income-specific contribution details.
Why should I start early?
Parenting is tough, and the finances around it are no exception. With the barrage of commitments from daycare to activities to food and clothing, it can be difficult to find a few extra bucks to commit to savings. The benefits of starting early, however, are worth the extra effort.
Maximize government contributions
If you contribute $2,500 per year, you will receive the $500 of government matching. The lifetime limit of $7,200 would be met in about 14 years, so if you start an RESP when your child is 10, assuming they start college or university at age 18, then it’s too late to fully take advantage of these contributions.
It’s tough to get a 20 per cent return in today’s volatile markets, so when the government’s giving it away, we think it’s wise to take advantage.
Decrease the burden on your children
Assuming you contribute the $2,500 mentioned above and receive the $500 government matching annually starting when your child is born, that’s a whopping $54,000 by the time your child is 18 – and that’s not factoring in any interest or capital gains. The average cost of a year’s tuition in Canada is $5,772, and will only go up over time. Paying for it slowly beats the years of debt repayment your child may face upon graduation.
Keep up with the cost of education
Tuition fees continue to rise in Canada, so compounding savings is a smart way to keep up with the times. Whether you choose to put your money into GICs, a savings account or the stock market, it will likely grow over time and compound in order to meet your child’s tuition needs. When was the last time money under your pillow worked for you?
Also read: No RESP: A $38,000 Mistake
Income is tax-deferred
We saved the best for last. Income earned from an RESP is not taxable until it is taken out. Since a student likely earns little to no income, they’re not likely to get a tax bill. In other words, it’s another way to reap the tax-free benefits of the TFSA.
If you’ve decided to go into your bank and open up an RESP (and we hope you have!), be sure to bring the appropriate documents for your child, including social insurance card, birth certificate or permanent resident card. Once you’ve opened your account, don’t forget to make it automatic. The last thing you want to do is open and forget, so automating monthly contributions will ensure your savings add up fast.
We all regret spending money on certain things, but a child’s education is not one of them. Start savings now. Your future self will thank you.
Have you recently welcomed a new addition into your family? Check out our Savings Calculator to help build her future!