October 1998

New Government Grants
Make RESPs a Great Deal

© Talbot Stevens

In my book, I did not endorse RESPs or Registered Education Savings Plans as the best way to save for a child's education. The negative of losing the growth if the child didn't go on to post-secondary education outweighed the positives of tax-deferred growth, which would face little, if any, tax when withdrawn in the child's name.

The financial industry's preferred approach of setting up an informal trust provided almost the same tax benefits without the risk. If the child didn't go on to further education, the money could be used by the child for any purpose, like buying a house.

This was all true — until recently. The last few federal budgets have greatly improved the positives and reduced the negatives of RESPs. The biggest improvement is the new Canada Education Savings Grant (CESG).

Annual RESP contributions of up to $2,000 will receive a 20% grant from the federal government, to a maximum of $400 per beneficiary per year, up to and including age 17. The maximum grant per beneficiary is thus $400 over 18 years, or $7,200, if you started when the child is born. Unused CESG room can be carried forward. RESP contributions are limited to $4,000 per year, to a lifetime limit of $42,000.

If the child does not pursue higher education, the grants are simply repaid to the government. Modest restrictions apply for beneficiaries turning 16 or 17 to qualify for the grant. See your advisor for details.

Significant changes have reduced the downside of RESPs as well. Family plans can now be set up to name multiple beneficiaries, so that if one doesn't go to school, the money can be used by others.

More importantly, the consequences of the worst-case scenario, where no beneficiaries pursue higher education, have improved. Before, all growth was forfeited if the child skipped school. Now, if the RESP is not used for education, the growth beyond the amount contributed can be recovered.

If the plan is at least 10 years old, the RESP growth can be transferred to an RRSP, if you have enough contribution room. In 1999, the maximum RESP transfer to an RRSP without penalty is $50,000.

Any growth that cannot be transferred to an RRSP can be returned to the donor after paying a 20% penalty. Regardless of what the child does, the original RESP contributions can be recovered tax-free.

Saving for an education is one of the top financial goals for a family. Higher education is more important than ever to secure a good career, at a time when tuition costs are skyrocketing. The average cost of a four-year education 18 years from now is projected to be around $75,000.

With the new grants, higher contribution limits, increasing need for education savings, and the reduced risk of losing the growth, RESPs will soon become as important and popular as RRSPs.

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