Back to School: Saving for your child’s post-secondary education
In our past couple of blog posts, we have focused on parents whose children are finishing high school and moving on to a job or post-secondary education.
This week, we are going to switch gears and focus on parents of younger children. This post may even be of interest to those who are expecting a new addition to their home – it is never too early to start saving for your child’s future.
I will start with an introduction to RESPs, and then discuss some things you should think about when you decide to start saving for your child’s post-secondary education.
What is an RESP?
An RESP, or Registered Education Savings Plan, is a tax-deferred savings plan that allows you, family members, or friends to contribute toward your child’s post-secondary education.
Over the life of the plan, there is no tax on investment earnings, and your child receives grant money based on your contributions from the federal government for children under the age of 17. The BC government also offers a $1,200 BC Training and Education Savings Grant to parents who open an RESP when their child turns six. If your child was born on or after January 1, 2007 they are eligible.
There are a few plan options available to you, and RESPs qualify for a wide range of investment products.
How can an RESP help?
It is never too early to start saving for your child’s education. The earlier you start saving, the faster interest or investment earnings start to compound. The BC government’s grant is enough of an incentive to go out an open an account.
If you are diligent, you may be able to build up a decent amount of savings over time. This money will reduce your child’s debt burden, and not force you to look for lump sums of money to help them out during school. When your child starts taking payments from the account for their education, it is likely they will pay little or no tax due to fact they are not working full-time.
RESP savings and the money from the Federal Government’s Canada Education Savings Grant are eligible for a number of full- and part-time post-secondary programs, so your child is not limited to going to university.
Where do you open an RESP?
There are two types of RESP providers:
- Financial institutions – banks, credit unions, mutual fund companies, investment firms, and trust companies.
- Scholarship plan dealers – these companies only sell RESPs.
There are three types of plans available to you: individual, family, and group plans. Both Scholarship plan dealers and financial institutions offer individual and family plans. Scholarship plan dealers offer group plans.
Be sure you understand how each plan works, your obligations, and the fees associated with each plan. You should also ask questions about payout options, risks, and penalties for leaving the plan. Avoid making a rushed decision at an emotional moment, such as immediately after the birth of a child. Dropping out of plans can be very costly.
How do I withdraw RESP money?
Government payments or interest withdrawn from an RESP account is an Educational Assistance Payment (EAP). Once your child completes secondary school, and enrolls in a qualifying education program, you can request, on their behalf, to withdraw money from the RESP account.
You can withdraw as much as you want of your own contributions, but there are some limits on withdrawing EAPs. Finally, RESP payments are considered when you child is being assessed for Canada Student Loans and Grants.