The 2007 federal budget brought
big changes to the Registered Education Savings Plan
(RESP). If you think your kids (or grandkids) are likely
to follow in your footsteps and head off to university,
the new improved RESP could help foot the bill.
RESPs are tax-sheltered investment
plans for post-secondary education. You (the contributor)
are taxed on the income you contribute to an RESP before
it goes in, but your investment growth is untaxed. The
principal's returned to you, tax-free, when the plan's
withdrawn. The rest goes to the beneficiary (your kid
or grandkid), taxable to them as income. With education
and tuition tax credits, they can collect up to $19,000
per year, in today's dollars, before they're taxed,
says AIM Trimark's Jamie Golombek.
Under the new RESP rules, the lifetime
contribution limit is now $50,000, up from $42,000.
The annual contribution cap of $4,000 is no more, and
is now constrained only by the lifetime limit.
LUMP
SUM
With these limit changes, you can invest more, earlier,
increasing tax-deferred growth. You could now theoretically
invest $50,000 the first year. RESPs last up to 25 years
-- so the compound interest can stack up.
But it isn't so simple. Canada
Education Savings Grants (CESGs) are an incentive not
to invest a lump sum. They're paid into the RESP at
a rate of 20% of your contribution. The new maximum
annual contribution eligible for CESGs is $2,500 --
up from $2,000. This means you can get $500 each year,
up to a $7,200 limit.
You'll need to decide if the tax
deferral benefits outweigh the loss of the grants. "If
you don't anticipate cash flow needs in years ahead,"
says Ted Rechtshaffen of Toronto-based Tridelta, "a
lump sum may be a good choice." But since most people
don't have $50,000 lying around, he adds, "In many cases
you're better to go for the CESGs, anyhow."
Over seven grand in CESGs is nothing
to sneeze at, agrees Mr Golombek. He adds that the tax
benefits usually won't outweigh the lost grants. Many
variables will make the difference on your RESP returns,
including your child's age, the type of investments
-- income, dividends, or capital gains -- and their
return rate.
He endorses balance: a large initial
contribution, and then smaller ones to maximize CESGs.
For example, you could contribute $16,500 the first
year, getting your $500 CESG while kick-starting compound
interest-fuelled growth. The space left below the contribution
limit will let you maximize your CESGs in future years.
To do this, you'd invest $2,500 each year for the next
13 years, for the $500 CESG each year. A $1,000 contribution
in the 15th year will max out the contribution limit
and all allowable CESGs. After year 15, if we estimate
a 6% compound interest, the RESP will be worth over
$100,000.
If you've had an RESP for a few
years, but haven't reached your contribution limits,
you may now benefit from extra carry-forward of CESGs
from previous years. "CESGs are payable not only for
the current year, but are retroactive for each year
a child was alive, back to 1998," says Mr Golombek,
"to a maximum of $1,000."
And if you happen to have that
extra $50,000 from the get-go, Mr Golombek explains
that it may be best to place it in a non-registered
investment account, from which RESP contributions are
drawn each year. But that's another story.
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PERSONAL FINANCE
