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Funding a loved ones Education

Hope you’ve enjoyed your summer and taken some time off to rest and recharge. As the summer nears its end, we are starting to enter “back to school” season. That means it’s time to discuss education planning for your child’s schooling.

RESPs, or Registered Education Savings Plans, are extremely helpful in setting aside money for your children’s post-secondary education and taking away the stress lump sums may have on you budget.

Their goal is to encourage savings towards education by providing their own contributions. Unlike an RRSP, there is no tax deduction available for your contributions into your RESP. However, there are two big financial benefits to an RESP that make it special.

First, when the money is withdrawn from the RESP by the subscriber, only the earnings surplus over contributions is taxed. When the principal and returns are withdrawn in the future, the income stream is taxed at your child’s marginal tax rate which would be substantially lower than yours. 

The result is that your contributions can accumulate earnings over a long period of time and then be taxed at a much lower rate (or tax free), due to your child likely having little or no income.

Assuming your income will continue to go up, then this also means that you are sheltering contributions from further taxes down the line and transferring that money to your child early on.

The second big benefit is that the Canadian Education & Savings Grant earns a percentage of matching contributions from the government. The amount of matching contributions depends on family income and may be a maximum of 20% of the first $2,500 contributed each year. This means $500 maximum, with a cap of $7,200 for the entire grant.

You can start contributing to your RESP after the birth of your child, and anyone can contribute to it. It is permitted to have multiple plans, but the maximum total contributions per beneficiary is $50,000.

Your child can start receiving Education Assistance Payments (EAPs) once they have enrolled in post-secondary education. But be careful – if the funds go to non-education uses, the government may charge a 20% penalty.

There are other sources of contributions, like the Canada Learning Bond and any other provincial learning incentives that may be available. This is where your financial advisor can help you determine if you are eligible for any of these benefits. 

Depending on the plan, you may be able to choose how to invest the money or when the money is contributed, or it may be predetermined. Additionally, the choice between a family plan and individual plan requires further investigation.

There are many different financial institutions that offer RESPs, and investment options for RESPs include stocks, bonds, GICs, ETFs, and mutual funds.

The professionals at Kismet Wealth Group have dealt will all these choices before, and we can help you make the best decision for this investment climate or your child’s specific needs.