Investing for education
Saving for post-secondary education is a relatively straightforward goal that anyone of any age can get involved in. But you will save more effectively if you first figure out:
• roughly how much you need to save
• how much you can afford to invest, given your other goals and financial obligations
• what is the best way to invest
RESPs or Registered Education Savings Plans are a great way to invest because the federal government will deposit a percentage of anything you contribute in the form of a Canadian Education Savings Grant (CESG). Also, investment earnings won’t be taxed till the money is withdrawn – and perhaps not even then, depending on the circumstances.
Registered Education Savings Plan (RESP)
An RESP is designed to help pay for postsecondary education and is registered with the Canada Revenue Agency (CRA). The person putting money into the fund is free to choose how much to contribute and when and where to invest the money. No tax need be paid on any investment earnings until the money is withdrawn.
Factors to consider
• RESP savings can be placed in a wide variety of investments.
• The contributor chooses how much and how often to contribute, and how the contributions will be invested.
• Allows for joint contributors (must be spouses)
• The original contributions belong to the contributor and do not have to be used to fund the beneficiary’s education. The contributor can withdraw them at any time, but withdrawal may trigger a request for the repayment of any CESG money.
• Beneficiaries can be changed.
• If the beneficiary does not pursue post-secondary education, there are several options for closing the RESP.
• Investment earnings and any CESG money in the plan must be used for educational purposes.
• The contributor must authorize any withdrawals to pay for beneficiary’s education.
• The beneficiary must provide proof of enrolment in an eligible program in order to withdraw earnings and CESG money.
• Interest, dividends or capital gains accumulate tax-deferred in the plan
• When the earnings and CESG proceeds are withdrawn, they will be taxed in the hands of the beneficiary. In most cases, the beneficiary will have a relatively low income and presumably will be taxed at a lower rate than the contributor.
• The original contributions will not be taxed when withdrawn.
• If the beneficiary does not pursue post-secondary education, all grant money must be returned to the government.
• The contributor can roll investment earnings into his or her RRSP (if there is contribution room). If the earnings are simply withdrawn, the contributor will pay both a 20% tax penalty and income tax on the amount.
Fund your child’s education for free…
just by investing government grants
Canadians can save for education, even without investing their own money.
Simply by investing their Universal Child Care Benefit (UCCB) and making use of government grants, parents can save a significant amount for a child's post-secondary education.
Here’s how you can combine government grants to potentially build substantial education savings.
• Every month, until your child reaches the age of six, you’ll receive the Universal Child Care Benefit of $100. You can arrange to have that amount automatically invested in an RESP.
• A Canada Education Savings Grant of 20 cents for every dollar you invest will also be deposited into the RESP (subject to annual and lifetime maximums).
• The entire amount will be tax-sheltered. By the time your child is ready for post-secondary school, the amount may be enough to pay for your child’s education, without spending a penny of your own.
Potential RESP savings over 18 years using government-only programs
Check out how it works in these documents.
• All residents of Canada are eligible for the Canada Education Savings Grant (CESG) .
• The Quebec Education Savings Incentive (QESI) is available to Quebec residents only.
• The Alberta Centennial Education Savings (ACES) Plan available to Alberta residents only.
Your child may also be eligible for financial assistance through the Canada Child Tax Benefit (CCTB) or, for an additional $2,000, through the new Canada Learning Bond (CLB) , depending on your family’s income.
For more information on the grants available through an RESP:
• Alberta Centennial Education Savings (ACES) Plan
• Quebec education savings incentive (QESI)