Friday, 26 May 2017

Weekly Column: Does Your Child Need an RESP?

Will your child need an RESP?

Look around the community and you’ll find plenty of self-made men and women who set out on their own at a young age, without much formal education, and worked hard to build a successful farm or business. With determination and perseverance, and by the sweat of their brow, these entrepreneurs strengthened the local economy and contributed to their communities at the same time. 

While that generation had very little handed to them, it’s hard to know if today’s young people will have the same shot at life without their grade 12 plus some manner of formal education.

No one can predict what their children will want to be when they grow up, but we can acknowledge that times have changed. As farmers learn to navigate world markets and business owners face competition on a global scale, it’s hard to imagine what the career of a child born today will look like.

Just another thing to save for

With payments coming out your ears and a long list of contingencies to save for, your child’s post-secondary education might seem a long way off and the least of your worries. While this may be true, ask any grandparent how quickly a child grows up and leaves the nest. Committing even a small amount, monthly, to an RESP will reap rewards for your child in the future.

A Registered Education Savings Plan (RESP) is a means to save for your child’s education, whether it be an apprenticeship program, trade school, college or university. The plan is most beneficial because the Federal Government provides 20 cents for every dollar that you contribute (up to $500 annually). Anyone can contribute to a child’s plan. Also, there are extra options available for low income families.

Learn about RESPs

This is by no means the definitive explanation of how RESPs work. For more information, visit cra-arc.gc.ca and speak to professionals. Understanding RESPs is imperative to getting the most for your money.

Basically, your monthly contribution is supplemented by the government and invested. The money grows tax-free until your child is ready to use it at an approved institution. When the money is paid out, it’s taxed at the child’s rate, not yours. Assuming the child has little to no income, the money can be received at little cost. The RESP needn’t be used immediately upon graduation from high school can remain open for over 30 years.

Consider what’s right for your family. For instance, will you want the RESP to be transferable between siblings? Would you like to have a say in how the money gets invested or would you prefer to have a professional handle the details? These are questions to ask, whether you invest through a financial institution or credit union, a certified financial planner, or through a group plan dealer.

Know that there is a difference between group RESPs and individual or family ones. Each group, or pooled, plan works differently and has its own rules. There are often more fees associated with group plans and you must commit to buying a set number of plan units. Should you miss a regularly scheduled payment you may be subject to fees and penalties or your plan may go into default and be terminated. In such a case, you may lose some or all of your investment. Do your research and speak to a number of parents and professionals before committing to a group RESP.

Sacrifice for an investment

The list of things to save for can get downright disheartening. Retirement, emergencies, vehicle and home repairs…it seems there is no money left in a budget for fun and incidental spending. But if you find yourself sacrificing in the here and now to give your children the toys and gadgets they want, consider, instead, investing some of that money into an RESP so that they can earn a good living and buy their own gadgets in the future.

We could debate whether giving kids too much for free is a help or a harm to their character. Perhaps raising trust fund babies and providing them with brand new vehicles and designer clothes doesn’t prepare them for the real world at all.

On the other hand, having no future plans or resources is equally as debilitating. Discuss your children’s aspirations with them as they grow. Can they compete and succeed without further education? What are the projected costs of what they need?

Balancing your support with their own hard work and contributions will not only teach them responsibility but will get them started in life without the burden of significant student debt. RESP contributions, no matter how small, add up over time and are a sensible way to encourage a child to invest in their skills. The sooner you start, the better.


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