One of the exciting things to do for personal finance nerd parents-to-be is to think about opening up a Registered Education Savings Plan (RESP) for our future child.
Setting Up an RESP: How to Set One Up for Your Baby
Investing in an RESP for your child provides them with money for their post secondary school tuition and is a way to encourage savings for your child’s education. One thing my husband and I believe in and value as parents is to make sure our child doesn’t have to struggle with their post secondary education funding, or opt for not going to further their education with post secondary education because of the cost. We don’t want the lack of funds or worry about taking on student loans to be a barrier for them. I know that it’s a privilege for individuals to have their education paid for by their parents these days, but we hope that make that happen for our future child(ren).
What’s an RESP?
Well, in simple terms, an RESP is similar to an RRSP where it is like a BASKET of investments (you can hold the RESP in various things like GIC’s, mutual funds, equities etc.).
The difference is that it is meant for your child’s post secondary education. With the RESP, the parent (they name the funding person the “subscriber”) can contribute money for the child (they name this the “beneficiary”).
Also, keep in mind that RESPs can be for adults too, you just don’t get the CESG (a la free money from the government) if you are over the age of 17.
The Benefits of the Registered Education Savings Plan
- The CESG matches 20% of your RESP contribution, up to a total of $500 per year, when you contribute at least $2500 (however, with the enhanced CESG, depending on the family income the CESG amount differs– if you have lower family income your CESG is higher). The lifetime maximum CESG you can get is $7200.
- Your savings in the RESP grow tax sheltered. When you think about contributing $2500 a year, and a modest estimated 5-6% of compound interest over time (in this case, over 17 years of time, which is enough time to whether the highs and lows of Mr. Market) you end up with over $80,000 for your child’s post secondary education. How amazing is that? If you don’t believe me, check out the Get Smarter About Money’s RESP Savings Calculator
- You can contribute up to a maximum of $50,000 (which includes the $7200 CESG amount), and can keep contributing up to the age of 17 for your child
- The money is withdrawn tax free for a qualifying education program, and called “Educational Assistance Payments”
The best thing about the RESP is that the Canadian government provides something called the CESG, Canada Education Savings Grant. The CESG is basically like free money. It’s even better than the RRSP (Registered Retirement Savings Plan) because that’s tax sheltered, not actually free money from the government like this is!
Setting up a Registered Education Savings Plan
Setting up a RESP is easy, and similar to setting up an RRSP or a TFSA. First you should decide on what you want to put in your child’s RESP basket.
Given the long time horizon (assuming you start early enough) of 17 years, it is generally recommended that you invest in a mix of equities (mainly equities) and fixed income investments like bonds. Of course, it depends on your comfort level with risk. If you keep everything in a GIC, you’ll preserve your capital but might not see the growth that you’re hoping for.
Of course, the big bank financial institutions offer RESPs too but just be wary of the fees associated (e.g. registered plan fees, hidden mutual fund fees) with these.
Here’s a link to how we invested in our RESP for our newborn using TD e-series.
For more information on how to index invest and how to create an ETF portfolio, take the Young Money Bootcamp eCourse!
Putting the Registered Education Savings Plan into Action
Fast forward many years, and you’ve got lots of money and you’re ready to use your RESP for post secondary education for your young adult. Here’s a link from the Government of Canada site on how to use your RESP.
Readers, what do you think of the RESP? Which financial institution to you keep your child(ren)’s RESP in?