Many parents view the act of opening a savings account for long-term college savings as a good move. Once upon a time, it was. However, times have changed and a regular savings account just doesn’t cut it anymore. Unfortunately for some parents, they come to this realization much later on and regret the many benefits they missed simply because they chose the wrong savings vehicle.
Saving for college is not like saving for a car or a vacation whereby the costs associated tend to remain more or less the same. College is different in that the fees are constantly rising year by year – and by significant margins too. In many countries, the rate of college tuition increase has even surpassed that of inflation.
For parents, this means a proper savings vehicle is required that will grow their money overtime at a rate similar to that which college or university fees are increasing at. To assist with this, the Canadian government created Registered Education Savings Plans (RESPs) in 1998 to assist parents save for their children’s higher education.
Unlike a savings account, parents registered with an RESP provider, such as Knowledge First Financial, have access to the education savings grant offered by the Canadian government. Knowledge First Financial is one of Canada’s largest RESP providers and one of the best reviewed RESP provider. This grant is offered to parents in accordance with the amount they deposit into the RESP. The government contributes 20% for every dollar deposited, up to a maximum of $500 a year per child, for a maximum of $7,200. Parents can receive the maximum grant per year by depositing $2,500 in their child’s account.
Parents with low incomes who need even more assistance saving for college can apply for additional Canadian Education Savings Grants (CESG) to further boost their savings. Upon approval, such parents can receive an extra 10 or 20% grant, depending on their situation, for each dollar they contribute. This is on top of the grant offered to all parents.
Low-income families can also benefit from the Canada Learning Bond (CLB) as a result of using an RESP. If such parents have any children born past Jan 1st, 2004 they can apply for a CLB and receive $500 when they first join an RESP and on the following years receive $100 continually for the duration they are deemed eligible.
Apart from these benefits, it’s worth pointing out that all the money contributed to an RESP is tax-deferred. No taxes are imposed until the date of withdrawal provided the amount in the RESP is below $50,000.
Here are three RESP plans available for you to choose from.
1. Individual RESP Plan
An individual RESP plan is intended to pay for the education of one beneficiary. Anyone can open an individual plan and anyone can contribute to it. If the beneficiary doesn’t continue with their education after high school, you may be able to name another beneficiary.
2. Family RESP Plan
A family plan can have more than one beneficiary. But each beneficiary must be:
- related to the person who opens the plan (for example, your children, grandchildren, brothers and sisters), and
- under 21 when you name them.
3. Group RESP Plan
Group plans work differently from individual and family plans, and each plan has its own rules. They also tend to have higher fees and more restrictive rules.
You can open a group plan for one child even if he/she is not related to you. You must make a minimum deposit when you open the plan.
It is recommended that you research the Individual or Family Plans further before you decide which one suits you best and we recommend that you stay away from the Group RESP plans as they tend to be more complex and generally more expensive as well.
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