Registered Education Savings Plan Explained for Beginners
Hey, want to know an investment plan that can give you 20% return guarantee risk free per year? And also this plan is backed by the Canadian government. Are you in? Then make sure you stay until the end of this video. Hey guys, this is Thomas, Better Mindset, Better Life. In today’s video, you will learn how register education savings plan work. Why is it important to utilize the RESP compared to other investment plans and how do you get the 20% rate of return risk free in the RESP?
Let’s get started. We always want to give our best to our family, especially on our kids’ education. Even though compared to 50 years ago, going to post-secondary was not as glorious as before. There’s a growing consensus among Canadians that high school completion is merely the prerequisite. The good news is that Canadians who pursue post-secondary education indeed do much better financially in the long run.
So how much does education cost nowadays? Do you have any idea what is going to cost you to send your kids to college in the near future? According to Statistic Canada, in 2020, an average local post-secondary school will cost around $11,000 to $21,000 per year. An average degree usually takes four years to complete that. This will cost you at least $40,000 today. And these costs only refer to the tuition textbook rent and food costs, not measuring transportation or extra curriculum.
Education is very expensive
And the bad news is in 17 years later, the average cost will be 35% more. Because of inflation, it will range from $70,000 to $120,000 for a four year program. So who is paying the bill as needed? The parents that have to come up to pay for the tuition, or the kids have to work part-time or take out a student loan and graduate with a heavy debt.
And speaking of student loan, the Canadian Federation of Students estimates that average student debt is more than $28,000 today, and according to the Canadian Student Loan Program, most students take 10 years to pay off their loans, which means if Tom graduates from college at age 22 with a student loan, he won’t be able to do any major buying decisions such as his first home until age 32 or later, most likely, Tom will not save enough for his kids’ education by then, and the hamster wheels begins.
It is important to do something now because time is on your side. One of the best ways to save for your kids’ future education is through the RESP Program. Registered Education Savings Plan, short for RESP started in 1972 and modify in 1998 to include a grant from the government designed to help you save for a child’s postsecondary education like tax-free saving accounts, or register retirement savings plan. RESP not only can grow with a tax advantage, but the government also gives free money.
There are three key benefits of having a Registered Education Savings Plan. For every dollar that you put into the RESP, the governments will give you 20% bonus up to $500 per year and a maximum of $7,200 lifetime. If the entire family income is less than or equal to $47,000, then the governments will give you an extra $2,000 to the RESP. So working the math backward.
Start Thinking About Registered Education Savings Plan Early
If a family can invest $2,500 a year to maximize the bonus, there will be $3,000 per year invested into the plan, and with a 5% return per year for the next 17 years, there will be $80,000 in the plan, which is enough to pay most of, if not all the tuition for four year program. Even with hundred dollars per month contribution with the power of compounding, an average 5% return per year will still give you $40,000 in 17 years.
The second Registered Education Savings Plan benefits is the tax advantage during the saving phase, the growth on the investment is all tax sheltered, meaning no need to pay tax immediately on the gain or interest. And when the kit is ready to go to postsecondary, the R E S P withdrawal is considered taxable income on the kid, which is minimal or even no tax consequences. The last key benefits is the plans flexibility. The contributor is flexible. It can be the parents, other relatives or grandparents who wants to give this as a gift.
Its worth the investment
The ideal start time of an Registered Education Savings Plan is when the kid is still in its first stroller, but any time is still good as you can catch up on the bonus. The investment choice is flexible too. You can invest in saving bonds, mutual fund, ETF, stocks and cetera depending on your risk and return.
If the kids do not want to go to school at age 18, yet the Registered Education Savings Plan can last for 36 years, so they have plenty of time to decide or they can transfer the money to their siblings or if no one goes to school, the RESP Plan can roll back to the parents RRSP, but the grants has to return back to the government.
A Canadian Benefit
The bottom line is Canada is one of the few countries that give free money for Canadians. Future education, at least. Our neighbor, Uncle Sam does not offer a Registered Education Savings Plan like account. At most, they have a tax free account for education savings like our TFSA in Canada. I know it’s difficult to put more money aside given the current situation, but even if you are in a tight budget it’s still a smart move to open a register education savings plan for your child.
For every dollar that you put in there, the government will match it 20%. There’s no other investment that gives you 20% return guarantee. Next week I will share where should you start your Registered Education Savings Plan then? Do you leave it with the banks or into a scholarship dealer? If you like this video, don’t forget to smash that subscribe and the like button your support really means a lot to me.
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This is Thomas. If you want to learn how money works and how you want to work with money, then I’ll see you next week! Bye guys.