What is an RESP?
Allow your children to excel,
with a properly designed RESP
An RESP For your child…
An RESP or a Registered Education Savings Program, is a great way to start preparing for your child’s future, and at the same time get free money from the government to start a savings program for your child. In fact the government will contribute at least 20% on top of your own contributions, and even more if your income level is low. What a great way to maximize a savings program for your children’s education opportunities.
The 4 ways to pay for your children’s education…
We all want what is best for our family, and our children are the centre of those plans, and education planning should certainly be part of your future savings needs. At the time your children are ready to go to a post-secondary education there are 4 ways to pay for it as we have seen as Advisors.
1. You can prepare for it through an intelligent Savings program like an RESP, where you receive a bonus from the government on every dollar you contribute, up to maximums of course, but if you plan properly you will be able to receive a 20% bonus on the dollars that you contribute. This allows you to get an instant 20% return on your money, even before the growth of the fund itself. Wow a 20% return is hard to get on any contributions these days, so the governments contributions alone should be a great consideration when determining the best way to invest for this future obligation.
2. You can use money out of your RRSP to make sure that your children’s educational needs will be funded. But when you do this it certainly will have a negative impact on your own retirement, forcing you to either take a smaller income at retirement or postpone retirement for a few years to allow your account to catch back up. This we have seen has had dramatic impacts on our clients future RRSP account values, because even if you put back all of the money you had withdrawn over the years, you will find that the compounding effect of the money you took out, will be negatively impacted.
3. You can take out a loan to pay for the education, or borrow someone else’s money to fund the cost. This is a way to fund the obligation in hind sight. This is the most expensive way to fund their education, and is the reason why so many students find themselves in financial distress after their education. The interest rates on money that you borrow for education are generally the highest rates around once the education is finished and can plague students for 5-10 years after their schooling. This being a time when they are the most financially vulnerable, due to other obligations such as finding a new job, spouse and home.
4. You can let your child pay for their own education by working their way through school. While this method they say “Builds character” it puts a lot of pressure on the student when they are trying to focus on their education. This method is used generally when the parents have failed to plan, and do not have sufficient resources available to help their child out. Money should not be a barrier when it comes to higher learning for our children. Our society has evolved constantly over the last 100 years, and will accordingly evolve over the next 100 years, let’s give our kids the gift of education to ensure their success.
“An Investment in Knowledge pays the best Interest…”
Why is educating my children really important?
It sounds silly at first, but really take a look at why educating your children is so important. In an ever increasing global economy, the physical location of a worker is almost becoming irrelevant. Sure you will still need lawyers and doctors to be local to you, but there are thousands of highly skilled jobs that are part of our world economy that may be sourced out to a worker in another country. So having the skillset locally is invaluable to the success of our culture and to your children’s future.
In an article written by Keith Bradsher of the New York Times found here about the loss of white-collar jobs being similar to the loss of blue collar jobs to overseas operations should come as no surprise. What should come as a surprise is that this article was written in 1995, and over the last 18 years we have seen a constant shift of these jobs moving away in the millions. So staying competitive with the members of your community is no longer the greatest concern, now you have to be competitive on a global basis. It is our duty as parents!
How saving for your child today, can help You into the future…
There is little doubt that you value the opportunity of educating your children, and saving through an RESP is one of the easiest ways to prepare financially for it. But what happens if your child does not choose or need to go to school, what happens if they choose a trade or get a scholarship, or choose to study abroad, and then what happens? Well these are valid concerns or questions many parents have when considering setting up and RESP, so here is how it works.
If your child does not wish to go to school, or through self-learning does not need to go to school, then the value of your RESP can be transferred to your own RRSP, therefore giving you a better start to your own retirement by being responsible to your children’s educational needs.
If your child chooses a trade to enter into rather than a traditional classroom education, then there are plenty of opportunities to use your RESP. We have seen the RESP program grow with our needs over the last decade, and an education in the trades is just as eligible as an education in the classroom.
If your child is lucky enough to have earned a scholarship for a part or all of the cost of their education, then congratulations, they have done something right, and you have guided them perfectly to post-secondary education. At this point you are rewarded by allowing your RESP account to be transferred into your RRSP account.
And if your child chooses to study abroad, whether it is right across the border or across the pond, most accredited foreign schools are eligible expenses inside your RESP account. So have no fear, whether your child chooses to go to the University of Toronto, or Harvard, the expense in the eyes of the government is acceptable for your RESP account.
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“Education is the most powerful weapon which you may use to change the world…”
Interesting RESP Facts
Here are a few facts and figures drawn up for your information…
– The cost of a 4 year university of Toronto program ending in 2011-2012 cost $20,281 for tuition only, add on to that books, supplies, housing and food plans, you can easily top out at $40,000, and that is for today’s students, how much will the increase be at the time your child goes to school?
– If your child was born 5 years ago, and plans to go to school at the age of 18, the future cost assuming all things are level other than the rate of inflation will be $76,000 for tuition plus all additional costs. And if your child is born in 2013, the cost will be a staggering $101,000!
– If you choose to invest in a non-registered program, less the tax advantage status of an RESP and without the government contribution of 20%, you will be disadvantaged more than 33% at education time compared to someone who had contributed the same amount into an RESP over the same period of time.
– The government will match 20% of your contributions up to a maximum of $500 per year, so that means the maximum amount of money you should be contributing into your RESP to get the full benefit from the government should be about $225 per month. Any money you choose to contribute past this point should be a consideration for a TFSA or a 20Pay Plan.
– Due to the government’s contributions to an RESP plan, the investments are grown in a very regimented and highly conservative manner. So you receive a very steady and consistent rate of return.
RESP Contribution Limit
Although there is no Annual RESP Contribution Limit, there is a lifetime contribution limit of $50,000. So making a single deposit 1 year before the child needs to go to school does not make a lot of sense, as you will not receive the full benefit from the government in that deposit year.
There are many rules and regulations surrounding an RESP, so the best way for you to implement a program like this is to sit down with a professional who has implemented these solutions. As a father myself and a regular contributor to the RESP Program for my own children, you can be rest assured that I have found a best of breed solution for your children’s success.
How this type of investing has helped our clients…
In many of the cases when we are working with our clients, and we identify the RESP need, there is very little information our clients know about the RESP they may have with the Bank or one that was sold to them after a community festival (you know the ones, they offer a balloon to your children, then pull you aside for a “survey”)
This is a shame, as if you do not understand the rules fully, or the contribution minimums and maximums, or what the account value will be at schooling time, or if you are entitled to additional deposits from the government, then you cannot fully maximize this fantastic tool. We show our clients and guide them to maximize all the benefits that are available, and if you are not happy with your current level of service, we can do a transfer in kind to our approved RESP program and start getting you on the right track today…
How we can help you…
As a father of two children, I truly and uniquely understand the challenges that all new parents and young parents face. This is the most expensive time of our lives, when it comes to housing costs, vehicles, daycare, new clothes and a hundred other expenses that overwhelm us on a daily basis. But taking care of an RESP at an early age, with as little as $50 per month will set you on the right track for your children’s future success.
And if you are so lucky to have an overachiever at sports or academics, and they receive a scholarship, then you get to reap the rewards of your years’ worth of contributions, and transfer the account into your RRSP. So how can you lose and how could you save in any better way? Call our office today, and let us do a review of your current RESP, and to see if you are fully utilizing it, so that you may receive the maximum value into the future. You and your children deserve the best, call us today…