Education is every child’s basic birthright. But, unfortunately it comes with a price tag. Higher education is an almost insurmountable challenge for many a family and thus bright minds are getting trapped in an endless cycle of mediocrity. Despite the bleak nature of this picture, there are a few solutions to this. One of them is RESP.
What is RESP?
RESP or Registered Education Savings Plan is a financial plan that parents can opt for in order to start saving money for their children’s education from an early age. Though typically used for one’s own child, RESP can technically be used for any child’s future studies. However, it must only be used for a child’s studies. Use of this amount for anything else may result in fines.
There are a variety of rules and regulations to an RESP, but the basic premise is the same. It is a tax-sheltered account that you can use specifically for your or any other child’s future academic needs. It can be opened at most banks, with or without the help of a financial advisor. Since this account is tax-free, any interest accrued is yours to keep, which makes it a good choice for investment plans.
Why choose RESP?
There are a number of benefits unique to an RESP that make it the most responsible choice for saving for a child’s future. Heritage RESP tells you why.
One of the most important reasons to open an RESP and not any other account is the RESP’s ability to receive grants. RESP is essentially an investment account where you contribute a certain sum and receive interest. However, the Canadian Government may also grant you 20% of the sum you contributed up to a limit of $500 annually. This is known as CESG (Canadian Education Savings Grant).
Additional Canada Education Savings Grant (ACESG) also provides opportunities to lower income families. Moreover, some provinces also allow grants for account holders. Quebec Education Savings Incentive (QESI) and Saskatchewan Advantage Grant for Education Savings (SAGES) both match 10% of the amount provided by the account holder, up to $250.
Unlike your savings account, RESP is not taxable. The Canadian Government wants its citizens to be educated. Thus, any interest accrued here is yours and yours alone. In the long run this is a much better option for your child.
Dedicated Savings Account
It is easy to borrow from your child’s account in times of a cash crunch with the intent to pay it back later. It is much harder to actually pay it back in times of austerity. Having a dedicated savings account where the investment amount can only be used for their education purpose makes it more likely that you won’t unintentionally deplete those savings.
So how much do you save?
Now that we know about the benefits of RESP and how to go about investing, we come to the real question – how much does it actually save. This is a difficult question to answer since a lot of variables are still undecided. The amount you can invest, and for how long plays a crucial role in the savings. Expenditure is nearly doubled if your child chooses to live in a different city for their schooling. This is all further complicated by whether your child has a scholarship, will be paying a part of tuition, or not.
Let us assume, your child does not live with you and will pay 10% for their own schooling. Average university costs are around $77,000 for a Canadian citizen. Thus, you need to pay about $60,000. Assuming a real rate of return at 4%, you need only pay $163 per month to reach that goal. Anything extra will be your savings. Thus, if you pay the maximum for 18 years, you’ll exceed the required goal by $25,000 which will be your savings.
Investing in an RESP takes a huge load off of parents who might otherwise struggle to send their child to school. For older parents who will retired by the time their kid graduates, it is one of the best options available right now.