Congratulations, you just had a baby! While you enjoy the attention of family and friends, here is a scary thought: By the time your baby heads off to college or university, you could be forced to pay up to $100,000 for an education.
The average outstanding debt from both government loans and lines of credit to get a four year degree in Ontario is $37,000 in 2014.
Option One: Self Directed RESP
Parents, grandparents, relatives or even friends are all able to open a Registered Education Savings Plan (RESP) for a future student. There are different RESPs to choose from! The Federal government has established the Canadian Education Savings Grant (CESG) program to encourage you to save. To get the grant money you need to make annual contributions to the RESP plan.
Limits & Conditions
– Lifetime RESP contributions limit of $50,000 per child
– Maximum grant money available is $7200 per child
– Grant limited to $500 per year on an annual contribution of $2500
– The grant is only available until the child is 17 years old
– The child must enroll in a qualifying educational program
– Investment income & grant money is taxable to your child when withdrawn
Termination of a Plan
– Grant money is refunded
– Contributions are withdrawn tax free
– Income accumulated in the plan is subject to 20% tax
– All income is taxable to the contributor of the plan
– To avoid tax, contributor can transfer the income to their RRSP if they have contribution room
It is important to open a plan as soon as the child is born. A $2500 contribution into the RESP on junior’s first birth will add another $500 gift from the government into the plan. If you forget to make a $2500 contribution into the RESP on junior’s second birthday, then no 500 gift from the government.
Option Two – Joining a Group RESP
It is geared to low income families that can only commit to small monthly contributions. There are costly early withdrawal fees and penalties. It is very important to read the fine print and compare different providers of group RESPs!
- What fees are you expected to pay, and when?
- Do you have a choice about when and how much you contribute?
- What kinds of post-secondary programs qualify?
- When and how will your child receive payments from the plan?
- What happens if the student does not go on to education, or does not complete their program?
- What happens if you sign up for a plan, but change your mind?
I personally don’t like Group RESP’s, if you can’t save $200 per month for a self-directed plan, then put whatever you can afford into a Tax Free Saving Account (TFSA). You control how it is invested and it grows tax free.
When relatives ask what your kids want for birthday and Christmas presents, ask for a low cost toy and a cash donation to the kids’ education fund. Toys are great but the gift of an education lasts a lifetime!
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