Three Things You Should Know About RESPs

A post-secondary education is an important asset for participating in a modern economy, but getting one can be expensive.

When you add up the costs of tuition, school-related fees, books, accommodation (if living away from home), transportation and various other items, a current four-year degree can cost $60,000 to $70,000. Factor in inflation over the next 18 years and the amount is even more daunting.

Saving for your child’s education is always a good idea, and one of the most effective ways to do so is through a registered education savings plan (RESP), which offers a number of benefits.

1. Your savings can grow tax deferred.

An RESP is a tax-sheltered investment account that allows you to contribute up to a lifetime maximum of $50,000. Funds in the account can grow tax deferred and, when it’s time to withdraw them, the earnings will be taxed in your child’s hands—typically at a much lower tax rate than yours.

2. Government grants can boost your savings significantly.

For the first $2,500 that you contribute to an RESP every year, you get a 20% grant, called the Canada Education Savings Grant (CESG). That’s $500 in free money, up to a lifetime maximum of $7,200 per child.

And if you miss a year of contributions, you can carry forward unused CESG contribution room, to a maximum of $1,000 per year. That means you can make some of the missed contributions in a future year.

According to a recent government report, only 47% of children have participated in the CESG program. Whether it’s a lack of awareness or an issue with cash flow, many Canadian parents are missing out on generous government grants.

3. Opening an RESP is easy.

An RESP can hold any investment that’s eligible for a registered retirement savings plan (RRSP)—GICs, mutual funds, stocks, bonds—so you have many options. To open an RESP, all you need is your child’s social insurance number and an RESP application form from your financial institution.

Many financial institutions will allow you to set up a pre-authorized contribution plan to help you save regularly and automatically. With an MD RESP account, for instance, you can contribute as little as $25 per month.

Ideally, you would contribute $2,500 annually to maximize receipt of the government grants. But even if you can’t, small savings can still make a big difference in the long run.

Additional Grants Also Available in some Provinces

The Saskatchewan Advantage Grant for Education Savings provides a matching grant of 10% of eligible RESP contributions, up to $250 per year and a maximum $4,500 lifetime grant per beneficiary.

The Quebec Education Savings Incentive consists of an annual incentive payment to an RESP for an eligible beneficiary who resides in Quebec, to a maximum of 10% of RESP contributions (maximum payment of $250 in any given year).

On August 15, 2015, British Columbia introduced the BC Training and Education Savings Program (BCTESP), which provides a one-time grant of $1,200 per child to children who are RESP beneficiaries. At the time of application, the child and a parent/guardian must be residents of British Columbia. The child is eligible for the BCTESP grant from his or her sixth birthday until the day before the ninth birthday.

Note: The BCTESP grant will be offered by MD Financial Management in mid-2016.

The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit md.cma.ca. MD Financial Management Inc. provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. MD Financial Management Inc. is owned by the Canadian Medical Association.

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