Parents typically want what is best for their children. For many this means sending their children to post secondary education to obtain the skills needed in order to pursue a meaningful career and contribute to their communities. However, every year education is becoming more and more expensive at the same time we are seeing government assistance falling. If you're in the fortunate position to be able to contribute more towards savings, and you haven't already utilized a Registered Education Savings Plan (RESP) for your child's future education, it's time to start!
Lets start with the fact that you get a guaranteed 20% return on your money! Need I say more? So how exactly does it work? The government has a program called the Canada Education Savings Grant (CESG). Under this program the government provides a grant of 20% on the first $2500 of annual contributions towards an RESP (You can contribute more than $2500. But anything beyond $2500 in a single year receives no CESG unless you have carry forward room for years the child was eligible but no contribution was made).
If you contribute the $2500 max annually, the government will give you $500 to add to the money you have contributed within the RESP. There you have it, an instant 20% return. You put in $2500 and now you have $3000 that can be invested for your child's future ($2500 + $500). You receive this 20% grant each year you contribute until you reach the maximum level of assistance which is $7200.
This is available to each beneficiary you have. For example, if you have two children, and this year you contributed $2500 for each child, you would receive two $500 grants for a combined total of $1000 from the government. Even after you've maxed out the government grants available to you, you're still able to contribute towards a RESP (RESPs have a lifetime contribution of $50,000 per beneficiary).
Reason number two for getting started sooner rather than later is what Albert Einstein called the 8thwonder of the world: compound interest. The sooner the money is in the account the sooner you can begin to grow it year after year (I should mention that this growth is tax deferred). Maximizing contributions in early years allows you to compound both your money and the money provided by the government, leading to more money available when your child begins attending post secondary.
The example below shows the effects of contributing for 9 years to a RESP but at different times.
The first example starts the contributions immediately upon birth and stops after 9 years (there will be an additional 9 years where this money has the opportunity to grow before being needed). The second example shows the same contributions but in the last 9 years prior to your child entering post secondary. You can see the benefits of having your money compounding sooner. Not surprisingly (but sometimes forgotten), the same level of contributions but at different times leads to a $25,195.21 difference in capital available for post secondary.
You may or may not be able to save significant additional funds in an RESP. That doesn't take away the fact that even minor contributions receive the guaranteed 20% and where else can you get that? (Example: $1000 contributed to RESP will result in a government grant of $200). On top of this, the table below shows the power of compounding, and how more time invested typically results in more money available in the future. Smart money knows that minor adjustments today, make a major difference down the road.
Assumptions: 6% rate of return Annual contributions of $2500 made at beginning of year* No inflation**
*Important to note that both examples above have $2700 of CESG left on the table. If possible, do your best to obtain every bit of CESG available to you. Unless you're in the fortunate position to dump $50,000 upfront into an RESP and have it compounding right away.
**We recommend increasing your contributions to match inflation each year if you want to incorporate it in your calculations. The above example assumes no inflation and has level contributions through the period.
- Brandt Butt, Investment Advisor Brandt Butt is an Investment Advisor at award winning firm Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families. This information has been prepared by Brandt Butt who is an Investment for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
**If you'd like to read more about RESPs, feel free to visit: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps.html
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