Everyone knows that post-secondary education can be expensive. According to Statistics Canada, a bachelor's degree can cost as much as $7,000 per year. And that doesn't include living expenses if your child doesn't live with you, i.e., the increasingly high cost of housing, food, school supplies, cell phone, transportation, and so on. The total annual bill could easily go as high as $14,000, according to the Alloprof website.1 And you'll have to multiply that cost by each year your child is in school.
As a parent, you don't want that financial burden to get in the way of your children's career goals. Contributing to a registered education savings plan (RESP) will allow you to give them the help they need when the time comes.
An RESP offers many advantages. Although they don't reduce your taxable income, they offer the possibility of building tax-free savings since the money you invest generates investment income. That's why it's important to start contributing early so you can accumulate returns. In addition, you'll get government grants equivalent to 30%2 of your contributions, or sometimes more depending on your household income, which will significantly increase the funds available. Imagine getting a 30% return on your investments. That's nothing to sneeze at.
How to get even more from an RESP
Some strategies make the most of the benefits offered by RESPs, especially when the time comes to make withdrawals. In fact, as soon as a child registers for post-secondary studies, you should think about withdrawing from the RESP. There are different ways to make the most of withdrawals.
The money will be paid out as educational assistance payments (EAPs), which consist entirely of funds from government grants and the income generated by the money saved in the RESP. They can be used to pay for tuition, textbooks, housing, a car, etc. Expenses don't have to be justified.
"It's important to withdraw the grants first," said Hélène Pelletier, a financial planner at Desjardins. "If there's any money remaining from the grants when the child finishes their studies, it will have to be paid back to the government. That way, the capital invested in your RESP continues to grow, even when you're making withdrawals." It's worth noting that under a family plan, you can still transfer unused grants to your child's brother or sister.
You should know that the maximum EAP that can be withdrawn for the first 13 weeks of full-time post-secondary education is $5,000 ($2,500 for part-time studies) After that, there are no limits.
"You have to plan withdrawals wisely to minimize the tax impact on your child, since EAPs are taxable," said Hélène Pelletier. "If your child earns more than $14,398 in one year, including the amounts received from the RESP and the money they earn from their job, they'll have to pay tax. You should closely analyze the situation before giving them money."
Under a family plan, it might be a good idea to withdraw the beneficiary's contributions so they can be immediately reinvested on behalf of a younger child. "This rollover strategy makes it possible to receive additional grants," she said before adding a caveat. "But in a family RESP, it's important to make sure that withdrawals don't affect the payment of annual grants for younger siblings. Keep in mind that to get the most out of these grants, your annual contribution to the RESP should be $2,500 per year, or $5,000 per year if you have unused RESP contribution room."
As the subscriber, you have the option of withdrawing all of the contributions you make. This capital will not be taxable. You can then decide whether to give it all to your child or get some of it back. "In this case, you have many more tax strategies," said Hélène Pelletier. "You could set up an RESP for a younger child and receive additional grants, according to the prescribed limits. You can also contribute to your own RRSP if you have unused contribution room. Another option would be to give the money to your child so that they can invest it in their TFSA, where it will continue to grow."
She said not enough families use RESPs. According to Statistics Canada, in 2020, only 66% of Quebec students had savings set aside for post-secondary studies, and 85% of these savings were invested in RESPs.
"RESPs are a financial instrument that can help your child reach their goals for the future. The assistance they offer is priceless," said Hélène Pelletier.
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1. Allo Prof. Les coûts des études, [Online], April 2021. https://www.alloprof.qc.ca/fr/eleves/bv/education-financiere/les-couts-des-etudes-h1817 (in French only)
2. The maximum for government grants is $7,200 from the Canada Education Savings Grant (CESG) and $3,600 from the Québec Education Savings Incentive (QESI), which add up to a total of $10,800.