12 Sep RESPs: A Hidden Gem of Opportunity
By Grant T. Smith
Today I am talking about making great choices. Choices that will impact:
- Future tax planning
- Educational opportunities
- Career choices, and
- Your feeling of self-worth
I know what you are thinking, “Wow, this must be an amazing and awakening article!”
First, let me applaud you on your use of alliteration – well done. Now, we can start talking about Registered Education Savings Plans (RESP).
I was recently interviewed on this subject and it got me thinking about what a great opportunity we have as taxpayers to support our children and grandchildren. Yet this great tool is seldom used, so I thought a primer might be in order.
Why should you consider an RESP?
There are two major reasons you should be using an RESP. First, income earned on RESPs is not taxed until it is ready to be used and withdrawn. That is to say, income earned on those savings is tax deferred until your child goes to school and withdraws that income. Second, the federal government will match 20% of your contributions, up to $500 per year per child. This means if you contribute $2500 in a year the government will add $500. Yes, there is free money.
When your child or children start to go to school and withdraw the funds, no tax will be paid on the contribution or grant amounts and, although tax will be charged on the income amounts, it will be taxable in your children’s hands. As the children will likely be in a lower income position the rate of taxation is probably lower than the rate of taxation you would be paying.
So,let us go back to my bullets. Tax planning is achieved any time we manage to defer tax on income and in this case we not only defer it, but we likely reduce the taxable rate, so this is an effective tax planning strategy. Plus, with your contributions matched by the government you will increase the income stream on the pool of funds effectively increasing the amount of money that ends up in your child’s hands.
Educational opportunities abound with this process; the most obvious is that it opens doors to higher education for your children by putting aside money to support their postsecondary studies. Less obvious perhaps, is the educational benefit of building an RESP with your child. One of my colleagues regularly reviews the RESP contributions and subsequent growth with her children. Through this experience, they are learning financial strategies and ultimately learning about money. They are also understanding the value of an education and the expectation that their education will be lifelong. These are perhaps the greatest coping skills we can give our children, in this day and age.
From the point of view of career choices and the feeling of self-worth, I stress again that ongoing conversations about money and education open the door for children to understand that they have opportunity. Helping your children or your grandchildren to understand these choices, as I learned this summer, while sharing two weeks with my grandchildren, is incredibly rewarding.
Finally there is much more to say about RESPs. We can talk about the nature of the plan (group plans, family plans and individual plans). We can talk about the investment and we can talk about what happens if your child does not go on to further their education. Send me some feedback, if you would like to hear a little more.