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April 11, 2007, 5:19 pm

Thinking of your children’s education

by: The Financial Blogger    Category: RESP

The price of education has been sky rocketing in the past years and I’m sure that your income didn’t! As we are all in the same boat, we might find solution to help your children to have the chance to go to school. Waiting for government’s help is obsolete, especially with all the baby boomers coming to retirement. The government will have enough on its plate with the pension and health costs. However, there is a simple and easy way of helping out your kids.

In most countries, governments created plan where you can save money for a specific goal; children’s education. In Canada, we call those plans RESP (Registered Education Saving Plan). The government will contribute according to the amount of contribution from the parents (20% of the contribution, up to $400 a year in 2007). Therefore, you will be not the only one to try to build a future to your kids.

The RESP works as an RRSP (Registered Retirement Saving Plan) in Canada. The money is invested in qualified financial products such as mutual funds, bonds or even stocks. The growth can come from paid interests or dividends and also capital gains. Taxes will be postponed until the child is starting to withdraw the money. It will then apply to his taxed income. As a student, your kid should not make much money. Therefore, he/she won’t pay much tax on the withdrawals.

What if your daughter doesn’t go to University? Depending on the type of plan and countries, you might have other solutions. Most plans are very flexible and allow withdrawals for techniques, college or for specific type of work such as electrician, plumber, and mechanic. Some plans are designed to be used for more than one child and can even apply to related kids as your nephews and nieces.

Worst comes to worst, Canadian plan allow the contributor to withdraw the money for other purposes as well. The only counterpart is that the government will take back is contribution plus the growth related to it. In the end, you won’t loose your own money!

If you start at your son’s birth you can pay off almost all his education. With a monthly saving plan as low as $25 a month, you will get $14,725 after 20 years! In this example, I’m not even counting the government contribution. With this additional contribution, you go up to $17,670 with a 8% yield. I’ll let you figure how much you would get with a $50 a month contribution!

RESP’s offer so many options that you must sit down with a financial consultant or your banker to choose the plan that will suit best your and your children’s interest. All that to make your kids’ future a little bit brighter!

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