With back to school once again upon us, it’s the perfect time to discuss the rising cost of post-secondary education. Many parents know sending their child to college or university is expensive, but many aren’t able to put an actual dollar figure to it. 37 percent of parents said they had no clue how much to budget for non-tuition living expenses like groceries, rent and textbooks, finds a new CIBC poll.
Parents aren’t any better at estimating tuitions costs; only 20 percent correctly guessed the average cost of tuition is between $6,000 and $9,999. When all is said and done, parents should expect to spend at least $100,000 on a four-year degree or $25,000 per year when living costs are included.
Parents Confused About RESPs
Registered Education Savings Plans (RESPs) are the best way for parents to save for their children’s post-secondary education, yet many parents don’t understand how they work. RESP are popular with parents: 76 percent of parents use an RESP to save toward their children’s post-secondary education, but there’s a lot of confusion around the rules.
31 percent of parents didn’t know they could catch up on claiming Canada Education Savings Grants (CESG) in another year. Although the initials of RESPs may be similar to RRSPs, they’re quite different. While contributions to RRSPs are tax deductible, RESPs contributions are not – 53 percent of parents mistakenly believed RESP contributions were tax deductible. Furthermore, 45 percent thought RESPs can only be used to pay for their child’s tuition, when they can in fact go towards other post-secondary living expenses.
When you contribute to your child’s RESP, similar to an RRSP, the money grows tax-free inside. That’s not all – RESP contributions are eligible for a 20 percent government top up. By contributing a full $2,500 annually, you’ll receive the full $500 CESG each year from the government. Parents are able to contribute up to $50,000 to their child’s RESP until they reach 31 years old.
When it comes time to attend college or university, funds withdrawn from the RESP are taxed in the hands of your child, not you, the parents. This is advantageous since your child will typically have little to no income during the time he or she is college or university, meaning he or she will have little to no income tax to pay. Similar to RRSPs and TFSAs, RESPs can hold a variety of investment types, including stock, bonds, mutual funds, index funds and GICs.
This is just a brief overview of RESPs. For more information, visit the Canada Revenue Agency website.
Are you interested in setting up an RESP for your child? Are you confused by the rules? We have a team of experts who can help you start an RESP for your child. Feel free to contact our office today.