Education Is One Thing That Nobody Can Take Away From You!
- by Monica J. Weissmann, CFP, CIM, MEE
Like many of us, I have emigrated to Canada from far away country. Like many of us, most of all I’m cherishing the gift of education that I have received due to my parents’ hard work and effort.
I was born and educated behind the “iron curtain”, in a Communist country. One of the impressive things in that environment was the education system. Schools had teachers who were dedicated beyond anything else to their pupils’ education and wellbeing. I am so grateful to my school teachers and university professors. My engineering master’s degree supported me across three continents and many countries during my lifetime.
There is no other thing that parents can give to their child of similar value. None will have a bigger impact on their life. Wherever you go, education is one thing that nobody can take away from you!
That makes the RESP – Registered Education Savings Plan – a very important piece in families’ financial planning. Canadian Government provides support to families who have RESP account and do the contributions.
Do you know what RESP is?
A Registered Education Savings Plan (RESP) is available for all Canadian children. The federal government matches 20% of your contribution savings for the education of child(ren) – to a maximum of $500 per child, per year – until your child turns 17. If the family
has more than one child a family RESP account can be opened. Families with lower income are granted additional incentive for contributing to RESP accounts. The child must have a SIN number to be eligible for RESP. RESP account can be open by parents, guardians, grandparents, other relatives, and friends.
One way to open RESP account is to take a “scholarship” offering which often exists in the hospitals. They are efficient in making sure that children are registered for RESPs. But are they the best way to invest your savings targeting your children’s education?
Maybe a better way would be to have RESP with a financial institution (bank, dealership or insurance company) which, being professionally managed, will provide a better, faster and solid way of increasing the value of your invested savings. Personal preference is very important, but do not shy away from checking your different options before making any decision.
One of the most important factors impacting the growth of investments in education savings account is the power of compounding! Let’s see the following example:
Let us assume that you have two children, and for simplicity assume that they are twins. You and your wife are working hard, and aware of the RESP, you save and invest 208 dollars per month for each of your twins (boy and girl).
Monthly savings will be: 208 x 2= 416 CAD
Annual savings will be: 416 x 12= 5000 CAD
Government is matching 20% of 2500 dollars per child or 500 dollars for each per year (for a max of $7,200 CAD per child):
500 x 2 = 1000 CAD
Total money invested for both children per year:
5000 +1000 = 6000 CAD per year
When children turn 18 (assuming contributions are made every year without exceptions + the growth of the account) the market value of the RESP account will be: *
108,000 CAD assuming 0% growth (nor decrease due to inflation)
142,185 CAD assuming 4% annual growth
185,041 CAD assuming 7% annual growth
243,268 CAD assuming 10% annual growth
Obviously, the annual rate of return combined with the compounding power of the time invested has a major impact on the finances available for the children’s education.
One more very important feature - RESP contributions benefit from tax-free growth over the life of the plan.
These are the main reasons why you should spend time to research the best options to invest your money in RESPs.
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References:
Registered Education Savings Plans and related benefits. CRA page.
https://www.canada.ca/en/services/benefits/education/education-savings/estimatingamounts.
html
RESP. https://www.embark.ca/understanding-resps
*https://www.calculator.net/future-value-calculator.html
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The Advisor and Manulife Wealth Inc. and/or Manulife Wealth Insurance Services Inc. ("Manulife Wealth") do not make any representation that the information in any linked site is accurate and will not accept any responsibility or liability for any inaccuracies in the information not maintained by them, such as linked sites. Any opinion or advice expressed in a linked site should not be construed as the opinion or advice of the advisor or Manulife Wealth. The information in this communication is subject to change without notice.
*The Future Value Calculator is for illustrative purposes only and should not be relied upon as an accurate indication of your financial retirement needs. As each individual’s situation is different and changes over time, the results are limited by the accuracy of the assumptions you make in providing the information used in the calculation. I (we) do not guarantee that this calculator is reliable, accurate or complete or that it will be compatible with your computer
