We often hear about the rising costs of tuition.
This leads to many new graduates carrying a lot student debt.
While we don’t expect to pay for our children’s entire post-secondary education, we would like to help by putting some money aside in a Registered Education Savings Plan, better known as an RESP.
RESPs have many advantages over a regular savings account. First, the money you contribute grows tax free; the only tax paid is when it’s withdrawn for education. But that’s not so bad either because it’s taxed in your child’s name, so the marginal tax rate will be low, if any at all.
Second – and an even better reason – is the Canada Education Savings Grant (CESG) that the government will kick in. They will match 20% of your contribution, up to $500 a year and a lifetime grant of $7,200 per child. Since we live in Alberta, we’ll also get an additional grant of $800 through the Alberta Centennial Education Savings (ACES) plan.
Wondering what happens if your children decide not to further their education? Well, there’s good news and bad news. After your child turns 21, you can transfer up to $50,000 from the RESP to your own RRSP without paying any taxes… but you don’t get to keep the grant money.
While it’s hard to imagine sending our son off to college right now, we want to be prepared to help him succeed when that time comes.
Everyone says they grow up fast.
Tom Drake is the owner and head writer behind Canadian Finance Blog and also works as a financial analyst for a major retailer. Tom and his wife Amanda welcomed their beautiful baby boy Christian in October of 2009. To read more of Tom’s posts, subscribe to Canadian Finance Blog’s RSS feed and follow @CanadianFinance on Twitter.