week 22 - Registered Education Savings Plans

Attention young families and new parents! By now, you have probably heard about the Registered Eduction Savings Plan as an option for helping your child with their post-secondary education studies. This will give you a guideline as to RESPs and how they work.

What is an RESP?

As mentioned, a Registered Education Savings Plan is an account that gets opened by a contributor, namely a parent, grandparent or guardian and has one or more beneficiaries, who can use the money for post-secondary education. Any growth or income resulting from investments within the plan is accumulated tax-free, like an RRSP. It is THE best way to save for a child's future education.

How do I open one?

You can go to any bank, investment firm or financial planner to fill out the documentation to open your plan. One thing to keep in mind: the child must have a social insurance number (SIN number) already.

What next?

Once the plan is opened, you contribute funds to the plan, like an RRSP. Although there is no tax write-off for RESP contributions, the Canadian government has created the Canada Education Savings Grant (CESG);

"No matter what your family income is, Human Resource and Skills Development Canada (HRSDC) pays a basic CESG of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200."

- source: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/cesp-pcee/csg-eng.html

If we do the quick math, that means you can contribute $2,500 per year to your RESP to get the maximum amount of grant money from the government.

What kinds of investments can I buy in the RESP?

The rules for eligible investments are basically the same as your RRSP; stocks, bonds, mutual funds are all acceptable. I would probably stick to one or two balanced mutual funds to start with. This makes it easy to save monthly and have an automatic investment of a certain dollar amount that could be pulled right from your bank account. Then the government grant money also comes into the account automatically too! Free money is a beautiful thing.

I would also recommend adjusting your RESP as your kids get older. You want to make sure that all the money is there when they need it and not cut down by rocky market conditions. This doesn't mean buying all bonds; it just means being smart.

How do I get the money out?

When your son/daughter starts school, you will need to provide a letter of acceptance and an invoice for tuition as proof that there is a need for the funds. As mentioned, the education must be considered to be at a post-secondary level.

A post-secondary educational institute includes:

• a university, college, or other designated educational institution in Canada;
• an educational institution in Canada certified by Human Resources and Skills Development Canada (HRSDC) as offering non-credit courses that develop or improve skills in an occupation; and
• a university, college, or other educational institution outside Canada that has courses at the post-secondary school level, as long as the student is enrolled in a course that lasts at least 13 consecutive weeks.

What if my son/daughter doesn't want to pursue any post-secondary education?

Not to worry. You can convert your RESP to a Registered Retirement Savings Plan (RRSP). There is an option with RRSPs to use funds for education down the road, should they decide to pursue that option later in life.

I think the RESP is an excellent option for education savings. Anytime you can get money from the government to help you with anything, it's worth taking advantage of.

I hope you found this helpful.

Cheers.

Guest Poster

Hi all -

This is from a guy that is interested in doing more financial writing, so he wanted me to post his material. I got no problem with it, so let me know what you think.

Canadian retirement planning options you must know

Retirement planning is a major financial task that most Canadians have to undertake.

Around 49% of the Canadian work force retires before they turn 60. Therefore, it is imperative to start retirement planning early in your life. The main aim of a retirement plan is to offer a regular source of income during your retirement years. Thereby, you don’t have to depend on your children financially. You can retain your self-respect and independence in the retirement years. Go through this article to know about various retirement plans available in Canada.

Canadian retirement planning options

Here are some of the Canadian retirement planning options that you must know:

1. Registered retirement savings plans: Most of the Canadians opt for this retirement plan. This plan permits you to save money in the RRSP account for your retirement years by making tax deductible contributions. However, you should remember that you have to pay tax on withdrawing money from the RRSP account.


2. Registered retirement income fund: This plan is quite similar to that of RRSP. The only difference is that you are required to take out a minimum tax-payable amount every year, according to your age. The remaining amount of money in the account becomes tax-free.


3. Registered pension plans: This is one of the most popular Canadian retirement plans. This is basically an employer-sponsored retirement savings plan. This plan offers a regular source of income to the employees of a company after retirement. However, in order to take advantage of this plan, both employees and employers are required to contribute to the plan.


4. Locked-in retirement account: If you have decided to leave your present company and to take out your retirement funds out of the company, then you have to transfer the funds into a locked-in RRSP, also known as locked-in retirement account or LIRA. As the name suggests, you can access the fund only after retirement.


5. Life income fund: This plan is just like a RRIF (registered retirement income fund), meaning you have to take out a certain amount of money each year. However, there is an annual limit on the amount of money you can withdraw. The amount of money that you can withdraw from this account depends your age and interest rates. The remaining amount stays locked so as to make certain that the fund is utilized for retirement purpose only. However, in case of emergency situations, certain provincial legislations permit you to withdraw a certain amount of money. You can set up a LIF account only when you are 55 years old.

Finally, you should choose a retirement plan according to your suitability. You should analyze the features of each Canadian retirement plan in order to determine which one will suit you best.

Hope you enjoyed the guest post! He wanted to remain anonymous.