The ABCs of RESPs

As parents we often think of the major milestones our children will accomplish – first word, first step, first day of kindergarten, and the list goes on… A growing number of parents are taking this one step further and are planning for their child’s first day of postsecondary education. 

While it may seem far away now, considering that your child may not even know how to sit yet, it is important to start preparing for that day sooner rather than later.

 Why save?

According to Statistics Canada, university tuition fees in 2011/12 were an average $6,062 - that’s 17.7% higher than they were four years ago. Costs continue to rise faster than the pace of inflation, leading some to believe that children born today will be looking at post-secondary costs in excess of $100,000.  As parents, no one wants to see their child struggle to pay for school and end up in debt.

Maximize your savings with an RESP

A Registered Education Savings Plan (RESP) is a plan registered under the Federal Income Tax Act that helps families save for postsecondary education. Not to be confused with a Registered Retirement Savings Plan (RRSP), contributions are made with after-tax dollars and income earned on contributions grows in a tax-shelter until a child is ready to attend college, university or trade school.

As an added incentive, the federal government’s Canada Education Savings Grant (CESG) and the provincial government’s Alberta Centennial Education Savings (ACES) grant can add up to an additional $8000 plus interest over the life of the plan!

The ABCs of RESPs

There are two main types of RESPs:  Group and Individual/Family savings plans: 

Group Savings Plans

Group plans are education savings plans with a scholarship plan dealer where regular contributions are pooled with those of other planholders providing better opportunities for higher returns than you would achieve on your own due to greater economies of scale.  These plans are ideal for those saving for children aged 12 or younger who are comfortable making regular contributions.  Some group plan providers offer additional incentives such as a share of income from cancelled plans, donations from the plan provider (often a foundation) and a refund of enrollment fees.  There is an option to transfer to an Individual or Family savings plan after having been enrolled for 3 years or more.

Individual and Family Savings Plans

Also known as self-determined plans, these are ideal for children 13 years or older, for parents who anticipate their child will attend a postsecondary program of two years or less, or for families who do not want to establish a regular contribution schedule.  The plans are managed by the planholder themselves or a financial or investment advisor. These plans offer greater flexibility than group plans but have a lower potential payout as there are no additional sources of funds and tend to have to assume greater risk to match the returns of group plans.  You can name one Canadian-resident child as the beneficiary in an Individual Plan.  In a Family Plan, you can name one or more children as beneficiaries provided they are all siblings and under the age of 21.

Start saving today

Many of us do save – but very often if is for our own retirement which is decades away. We tend to forget about saving for our kids’ education which comes much sooner than we think. The reality is that many parents will need and want to help pay for their child’s education before they retire - an RESP is often the best way to reach this savings goal.