How RESPs can help you pay for your education

Guest post by Claudia DoRego for Planswell.

Education is an investment in your future, and a Registered Education Savings Plan (RESP) just might be the best way to invest in your education. You get to invest your money for growth, avoid all taxes until you make a withdrawal, and earn some free government grants along the way. Here are some of the main things to know about RESPs.

Earn tax-free growth

When you contribute money to an individual RESP account, it can be invested in stocks, bonds, ETFs and mutual funds. In addition, the earnings from these investments can compound from year to year without having to pay any taxes on your gains. An RESP behaves very much like a Registered Retirement Savings Plan (RRSP) in this regard.

A couple of cautions. First, if you get your RESP from a bank or financial advisor, there is a good chance that mutual funds will be the recommended investment. While many mutual funds capture the returns of stock and bond markets, they do come with a catch: high fees. The average mutual fund will charge more than 2 per cent of your RESP balance per year in fees, which could take as much as half of your total gains over time.

The second thing to watch out for is group RESPs. There are just a handful of companies that offer group plans, and if you join one, you will not be able to select your own investments. Instead, your money is pooled with many other RESP holders, and you sign a less than ideal agreement. For example, if you fail to contribute to your account as agreed, you may have to forfeit all of your investment gains.

For many people, a desirable option is an individual RESP containing low-cost investments, such as ETFs. That way, you can benefit from market growth while paying the least amount in fees, and you are not bound by the rules and penalties of a group plan.

Get a guaranteed 20% return

A great feature of RESPs is the Canada Education Savings Grant (CESG). This program matches 20% of your RESP contribution up to a maximum of $500 annually and $7,500 over your lifetime. You can think of this as a guaranteed 20 per cent on the first $2,500 that you contribute each year. Where else can you find that?

The Canada Learning Bond (CLB) is another source of federal education assistance that is available to low income families. While the CESG and CLB are federal programs, British Columbia and Saskatchewan also have provincial programs that can potentially help you save even more towards school.

Go to just about any school

When it’s time to pay for school, you can make an Education Assistance Payment (EAP) from your RESP. This withdrawal is taxable, but the theory is that, as a student, you might not be in the highest tax bracket.

Once upon a time, an EAP could only be made to a restricted list of educational institutions – mostly mainstream Canadian colleges and universities. These days, the rules are much more liberal and most domestic and international post-secondary schools, including accredited coding bootcamps, qualify.

In terms of your workload, here’s what you need to qualify for an EAP to pay for full- and part-time studies:

Full-time studies. A course lasting at least three consecutive weeks and requiring at least 10 hours per week of study. The one exception is non-university level studies outside of Canada, which must last at least 13 consecutive weeks to qualify.

Part-time studies. A course lasting at least three consecutive weeks and requiring at least 12 hours per month of study.

You can use EAP proceeds for a wide variety of education-related expenses, including not only tuition, books and residence, but also meal plans and transportation to school.

Have a built-in backup

Some folks – especially parents of young children – worry that contributing to an RESP for years could backfire if their child does not pursue post-secondary education. There are two options in this scenario. One, it may be possible to use the RESP savings for another child, and two, it may be possible to transfer the unused RESP balance to your RRSP (although, in this case, you will have to return the grant money).

Overall, in most cases, it makes sense to take advantage of the tax-free compounding interest and free grant money of an RESP, even if you think there’s a chance the money won’t ultimately be used for school.

It starts with a plan

If you’re saving for school, especially on behalf of a young child, you probably have a number of financial priorities to balance. For example, as much as you want to take advantage of an RESP, you also need to do things like pay the rent or mortgage, purchase insurance, and build up your investments for retirement.

The best place to start is with a financial plan. A good plan will help you balance your priorities and lay out a path to get where you want to go while minimizing fees or taxes and taking advantage of perks like free grant money for school.

Oh, and if RESP contributions don’t fit in your budget right now, another great feature is being able to accept contributions from someone else: parents, grandparents, aunts, uncles, friends, generous neighbours… so feel free to get creative.

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