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The Registered Education Savings Plan, also known as the RESP, is a special account for parents who want to save for their child’s education after high school and in this article, I will be sharing everything you need to know about this investment plan. In fact, this investment plan can give you a 20% return guarantee risk-free each year and is backed by the Canadian government. Read on to see how it could work for you.
I feel like it’s important to paint the picture of what post-secondary education costs in Canada before we dive into the Registered Education Savings Plan. While post-secondary may not seem as glorious as it once was, there is a growing consensus that high school completion is a prerequisite to an academic path. The good news is that Canadians who do pursue post-secondary education indeed do much better financially in the long run, but, do you know how much it costs to obtain a post-secondary education degree? According to Statistics Canada, in 2020 an average local post-secondary school will cost around $11,000 – $21,000 per year, estimating at an average of four years to complete so you would be looking at least $40,000. In addition, that is only tuition and does not include other expenses like textbooks, rent, food cost, transportation, etc. Now, what about in 17 years? With inflation, it would increase this amount by 35% so a four year program in Canada could run $70,000 to $120,000.
The Canadian Federation of Students estimates that the average student debt is more than $28,000 today. In addition, the Canadian Student Loan Program found that most students take 10 years to pay off their student loans. A college graduate finishes school at 22 with a student loan, it would mean they would not be able to consider any large buying decisions like a home until 32. By then, if they choose to have kids, then they will not be able to begin saving for their own children’s education and the cycle begins.
Similar to the TFSA or RRSP, in Canada, the RESP is an investment account that can grow with a tax advantage and the government also will contribute free money towards it. There are three benefits to the RESP:
The best time to start saving is when your child is in their first stroller, though you can catch up on the bonus later. In an ideal scenario, if you invest $2,500 per year into the plan with a 5% return per year for 17 years, there should be $80,000 in the plan to cover the costs of tuition for a four year college or university degree.
The RESP can last for 36 years so your child has the flexibility to take time to decide whether or not they want to pursue further education, or the money can be transferred to a sibling. If no child in the family decides to go to school, the RESP can be moved to the parents’ RRSP although the government contribution would need to be returned.
Canada is one of the few countries that give free money towards Canadians’ future education and it is a smart move to start thinking about this when your child is young. No other investment gives you a 20% return guarantee! If you are interested in learning more about growing your financial wealth in Canada, please subscribe to my YouTube channel where I cover topics from taxes to RRSP to insurance.
Related article: How to set up your RESP