Why You Should Consider Starting An RESP When Your Child Is Still In Diapers
Planning Ahead You’ve just brought your beautiful new baby home from the hospital. Probably the last thing you want to think about is how you’re going to fund their post-secondary education.
“Raising a family can seem overwhelming financially at first. The cost of diapers, clothing, baby equipment, and child care can quickly add up and strain your family budget,” says Jane Rooney, Canada’s first Financial Literacy Leader at the Financial Consumer Agency of Canada.
Expecting parents can make a plan to handle the new financial responsibilities that come with children, she says. “Once the baby is born, I encourage everyone to think about opening a Registered Education Savings Plan (RESP) to help them save for their child’s education costs.”
“Finding money to save is a challenge for many Canadians,” says Liz Mulholland, Chief Executive Officer of Prosper Canada, an organization that aims to expand economic opportunities for low-income Canadians through program and policy innovation.
Saving a little now goes a long way later, because of the interest. Money earned in an RESP isn’t taxed until it’s withdrawn, she says.
A family who starts an RESP when their baby is born and saves $100 a month will have over $30,000 when their child is 18, assuming an average annual return of 3 percent, according to data from the Financial Consumer Agency of Canada. A family who starts when the child is ten and saves the same monthly amount will have only $12,000.
Your RESP options
Just like regular investments, you can choose from basic or high interest savings, Guaranteed Income Certificates (GICs), or mutual funds.
You can create an individual plan for each child, one family plan for all of your children, or you can invest your money in a group RESP, says Mulholland. A group RESP usually requires a commitment of regular payments over a period of time, and may charge fees if you don’t pay, says Mulholland.
Federal government grants can give your RESP a boost. The Canada Education Savings Grant (CESG) matches your RESP deposits at a rate ranging from 20 to 40 percent based on your income, with low income earners getting the higher rates, says Mulholland.
If you qualify as low income (i.e. your family receives the National Child Benefit Supplement), you may also be eligible for the Canada Learning Bond (CLB) which can provide up to $2,000 for your child’s RESP savings. You’ll receive $500 when you open an RESP, and up to $1,500 more by the time your child is 15.
“Some RESP providers charge service fees; others do not,” says Rooney. “Ask the institution to explain any fees, limits, penalties, or promises to make regular payments. Also ask about investment and withdrawal options. Make sure you understand all the terms and conditions.”
What if your child decides not to go?
The good news is they can wait until age 36 to use the fund, so there is plenty of time for them to change their mind. Or you can transfer it to another RESP, says Rooney.