The Registered Education Savings Plan (RESP) has been with us for decades now. Alongside, we have witnessed the evolution of the Canada Education Savings Grant (CESG) and other targeted financial support programs. Combined, these are powerful education savings vehicles for many Canadian families.
But can the RESP be even more than a tool for financing education? Can it, in fact, double as a tool for educating on finance itself and be an avenue for establishing lifelong savings habits for both parents and children?
Here are some considerations as to how coordination of the RESP and tax-free savings account (TFSA) might indeed pave the way to that future.
Age horizon for the CESG
The basic CESG entitles an RESP subscriber to 20% in matching grants on contributions. That equates to $500 of grant money that can be earned for a given year of the RESP beneficiary’s life, though as much as $1,000 may actually be paid during a plan year if there is unused room from prior years.
While an RESP can exist for as long as 35 years, the latest date at which CESG can be earned and paid is the year in which the RESP beneficiary turns age 17. Thus, for many families the practical timeframe is much shorter, particularly if the student is in the common education stream completing secondary school in his or her late teens.
Whether it makes sense to continue contributing to an RESP beyond this CESG eligibility timeframe will depend on the tax characteristics of both subscriber and beneficiary (most often parent and child, respectively). For some thoughts along similar lines, see my Tax & Estate Matters article from September 2010, “They grow up fast: Coordinating RESPs and ITFs.”
Age onset for the TFSA
Coincidentally, just when the CESG ceases to be available, the TFSA opportunity begins.
Annual TFSA contribution room (currently $5,000) begins to accumulate the year a Canadian resident turns age 18. If the age of majority in the province is 19 then there would be a year’s delay until a TFSA could be opened. (See grid below.) Fortunately, the contribution room at age 19 would include the carryforward from the prior year, totaling to $10,000 currently.
Continuity of the savings habit
After years of saving, no doubt many parents eye the end of RESP contributions as a welcome release of funds to the household budget. It’s okay to splurge a bit, but they should also keep the big picture in view.
The upward trend of tuition and surrounding education costs does not appear to be abating. Case in point, my brother tells me his son’s first year away at university will cost $25,000. At that rate, even parents who had conscientiously saved may find their RESP resources depleted well before junior dons the cap and gown.
Accordingly, it may be prudent to continue earmarking funds toward education savings. Failing that, parents may have a basement boarder much sooner than anticipated.
And while it may feel like a leap of faith to give money directly to a child for a TFSA, if carefully structured with incentives, parents can still hold some strings while teaching their young adults important life lessons in tax-efficient saving.
Age of majority
Age 18 – AB MB ON PE QC SK
Age 19 – BC NB NL NS NT NU YK
Source: Citizenship and Immigration Canada