Financial Friday #77: Back to School...and Another Year Closer to Graduation
If someone told you about a no-risk savings account that paid 20% interest for the first year on new deposits, and you could get that deal for the next 14 years, your scam-alert detector would be going off full blast!
Most savings accounts pay under 1% interest and although you may have hit 20% in the markets over the last year due to the post-pandemic recovery, those type of returns will be difficult to sustain over the next 14 years.
Moreover, this account also allows you to double dip. You get a 20% guaranteed return the first year, plus whatever returns you can get on top of that by investing in stocks, mutual funds, ETFs and/or term deposits.
The account is a Registered Education Savings Plan (RESP) and although it sounds too good to be true, anyone can go down to their local financial institution and open one to start saving for their child’s future education.
There is no charge to open an RESP (your child needs a SIN number), but there are a few differences between financial institutions. Look for one that offers a self-directed RESP so you have more freedom over the type of investments you can purchase and to keep your investment fees low.
Some of the other need to know facts:
• Contributions up to $2500 annually receive a 20% Canada Education Savings Grant (CESG) from the federal government regardless of your income level (low-income earners may also qualify for additional grants). Some provinces offer additional education savings programs that work in conjunction with an RESP.
• It isn’t just for university - colleges, technical training institutions, correspondence courses, even out of country programs often qualify.
• The CESG is only for kids under 18 and there is a lifetime maximum of $7200. Best to start early if you want to max out the benefits, although there are some rules to catch-up if you get started late.
• There are no tax deductions for contributions (unlike an RRSP) and there is no tax on contributions when withdrawn. Grant funds and any profits from investments are considered income and taxable when withdrawn, but students normally have a low tax rate so the effects can be minimal.
• The funds can be used for a wide variety of education related expenses - food, transportation, tuition, books, computers… and a lot more!
There is a ton of information out there on the ins and outs of RESPs and it can get a little tricky if you have a couple of kids. A good place to start is the government website.
School starts in a week or so and your kids will be inching another year closer to graduation, so it's definitely the season to think about their future education.
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