If you’re anticipating an income tax refund this year, you may already be thinking about how to spend it. There are plenty of options, after all, and everyone approaches this lump sum differently. Some families will replace that run-down washing machine with a shiny new model, others might plan a (post-Covid) vacation, and many will wonder how this money can best be used in a lasting, impactful way. If you’re a parent, we have a recommendation that is well worth considering: invest your tax return in a Registered Education Savings Plan (RESP). It’s a simple decision that will have a meaningful impact not only on your kids’ future, but on your own long-term financial success.
Saving for your child’s post-secondary education is about more than covering tuition payments and other school expenses — there’s a ripple effect that can help the whole family achieve financial stability in the years to come. Here’s how it works.
What to know about RESPs
First, a thing or two about RESPs. A Registered Education Savings Plan (RESP) is an investment tool that helps families save for post-secondary education in a flexible, convenient and tax-efficient manner. Anyone can open an RESP for a child: parents and guardians, grandparents and other family members, even godparents or other close family friends who want to contribute to the cost of your child’s education. There are three different types of RESPs: individual RESPs (in which one child is listed as the beneficiary), group RESPs (where your contributions are pooled with those of children the same age as your child), and family RESPs (wherein more than one beneficiary is named, for example, your son and two daughters).
Some RESPs require you to make monthly contributions, while others offer the flexibility to contribute whenever it makes sense for your family. This may be after special occasions or holidays, when financial gifts are often received or when you receive a tax refund. There is a lifetime total contribution limit of $50,000 per child, across all RESPs (students can have multiple RESPs).
Take a bite out of post-secondary expenses
The most obvious benefit of investing in an RESP is that when it’s time to pay for your child’s post-secondary expenses, there will be money set aside and ready to go. And, it will have had the opportunity to grow thanks to available government grants and income earned on your grants and contributions. For example, the Canada Education Savings Grant (CESG), provides a lifetime maximum of $7,200 per child, by matching 20% of annual contributions to a maximum of $500 per year. The Canada Learning Bond is another grant that provides low income families with up to an additional $2,000 per child. Some provinces offer additional grant programs, which can add more to your savings on top of federal grants. Not a bad deal, right?
Income on contributions and grants grows tax-free in the plan for up to 36 years (far longer than most families require). When funds are eventually withdrawn from the RESP for a student beneficiary, the grants and income are taxed in their name at their income level, which is typically much lower than the average parent’s.
Investing in education now means freeing up funds later
Tuition, books, living expenses…post-secondary costs add up fast. If you find yourself spending out of pocket to support your college-aged kids down the road, it’s got to come from somewhere — your pay cheque, your savings or maybe a home line of credit. While it’s great to want to help your children cover these expenses, it shouldn’t be at the expense of your own financial security. By investing in an RESP early on, you’ll be positioning yourself for a stronger financial future later on. Instead of stretching your budget to pay your child’s college bills, you’ll be able to focus on paying down your mortgage or saving for retirement — important parts of your own financial plan. And because your child will be supported by the funds in their RESP, everyone’s taken care of. It’s a win-win!
Help your kids get a debt-free start in life
Graduating from university with a pile of student debt is common, but it’s a real problem. A 2015 study by the Government of Canada revealed that 54% of university students carried debt at the time of their graduation from undergraduate programs, with the majority of those students owing more than $25,000 — even more if they earned a Master’s degree or PhD. It can take years or even decades to pay off these student loans, making it hard for new grads to live independently, save for their first house or otherwise get ahead.
Carrying student debt is stressful and puts new graduates at a significant disadvantage as they begin their adult lives. Fortunately, this can be avoided with some simple planning and a commitment to get ahead. By investing in an RESP, you could be saving your child from the serious burden of student debt later. This is an incredible gift that will allow them to leave college or university with confidence and the freedom to pursue their dreams.
Invest your tax refund in a brighter tomorrow
No matter where or what your child wants to study, you’ll be glad there’s money set aside to support their goals. CST Spark’s RESP, CST Bright Plan is an excellent option for families as it’s designed to maximize growth in the early years. The plan rebalances investments as your child gets closer to their high school graduation—essentially, reducing risk and maintaining gains within a carefully managed mix of exchange-traded funds (ETFs). Because CST Spark is a digital-first education company, you can open a CST Bright Plan online and conveniently from home in just about 5 minutes. You can control how much and how often to invest within lifetime contribution limits. CST Spark is a subsidiary of the Canadian Scholarship Trust Foundation, which is a not-for-profit, dedicated to helping make education accessible to all Canadians via scholarships, bursaries, awards and advocacy initiatives.
Small efforts, big reward
If you make investing your tax refund in an RESP an annual habit, it can really add up — especially if you start early. A small monthly contribution may be the ideal solution for some families but really, any contribution aids in the growth of your child’s education savings plan. These funds, along with interest and grants, will minimize or eliminate the need for student loans, creating an incredible foundation for your child’s education, their financial security and your own financial future. So, have you opened up that RESP yet? Trust us: future you (and your kids) will be glad you did.
This is a sponsored post in partnership with CST Spark. All opinions and commentary are SavvyMom’s and should not be construed as investment advice. C.S.T. Spark Inc. is the exclusive distributor of CST Bright PlanTM which is only sold by prospectus.