Back to School – Saving for your child’s future

It’s that time of year again! After a long break filled with endless sunny days with no homework, no early morning yellow bus and no teachers, your child finally has to go back to school!

Although post-secondary education may be a long ways away, it is never too early to start saving. By starting early, you may relieve your children from the potential burden of carrying large student debt after graduation. To help you save for this goal the Canadian Government has made a special type of account available to Canadian families.

This special account is called a registered education savings plan (RESP) and is used as an investment tax shelter to help save for your child’s future. On top of paying no taxes on the investment returns in this account, the government helps you grow this nest egg through various monetary benefits.

Whether you open up a family plan with various potential beneficiaries or a specified plan with only one child reaping the future educational funding, the government offers the following benefits.

·         The Canadian Educational Saving Grant (CESG): The CESG is essentially free money given to you by the Canadian government to help grow your child’s education fund.  Regardless of your family income, the government will match 20% of your contributions, up to a maximum of $500 per year (per child). Furthermore, if your family income falls below $87,907 (for 2014) you can receive a supplementary amount up to a maximum of $100 a year depending on your income threshold. As well, even if you weren’t able to contribute in a given year, the unused CESG amount accumulates and can be paid on future contributions (up to a maximum of $1,000 a year for the basic CESG).

·         The Canada Learning Bond (CLB): The CLB helps families that receive the National Child benefit supplement by giving up to $2,000 per beneficiary (during the life of the plan). An amount of $500 is received immediately after opening the RESP account along with a supplementary $100 a year until the child turns 15, without having to contribute any of your own money.

Knowing that the government matches a certain amount of your contributions should be even more of an incentive to save for your child’s future. When thinking of opening an RESP, use the following tips.

·         Start early. The earlier you start, the more you can accumulate and the more returns you can make on both the government benefits and your own contributions. As soon as your child has a sin number, you can open and start funding an account!

·         Small periodic amounts add up! There is no need to make large lump sum contributions. Setting up an automatic periodic contribution forces you to make saving a habit and is typically the easiest way to invest for the long term.

·         Think long term. When you start saving, your time horizon is likely quite long until your child’s first day of university or college. Over the long run equity markets have been proven to have higher overall returns. Even risk averse investors should have a small portion of their investment in equities to help their child’s educational fund grow.

Once the funds have been accumulated, the beneficiary must simply demonstrate that he or she is attending qualifying full-time post-secondary studies. Then, the educational payments made up of the contributions, grants and the accumulated investment earnings will be made to the recipient to help them pay for their studies. From a fiscal point of view, the contributions are not taxable; however the accumulated investment earnings and the CESG’s are considered taxable income to the beneficiary when withdrawn from the plan.

Education is one of the most important investments in an individual’s life, why not help your child and invest towards his or her future?