Friday, August 27, 2021 / by Mario Daniel Sconza
Financial Friday #77: Back to School... and Another Year Closer to Graduation
If someone told you about a no-risk savings account that paid 20% interest for the first year on new deposits, and you could get that deal for the next 14 years, your scam-alert detector would be going off full blast!
Most savings accounts pay under 1% interest and although you may have hit 20% in the markets over the last year due to the post-pandemic recovery, those type of returns will be difficult to sustain over the next 14 years.
Moreover, this account also allows you to double dip. You get a 20% guaranteed return the first year, plus whatever returns you can get on top of that by investing in stocks, mutual funds, ETFs and/or term deposits.
The account is a Registered Education Savings Plan (RESP) and although it sounds too good to be true, anyone can go down to their local financial institution and open one to start saving for their child’s future education.
There is no charge to open an RESP (your child needs a SIN number), but there are a few differences between financial institutions. Look for one that offers a self-directed RESP so you have more freedom over the type of investments you can purchase and to keep your investment fees low.
Some of the other need to know facts:
• Contributions up to $2500 annually receive a 20% Canada Education Savings Grant (CESG) from the federal government regardless of your income level (low-income earners may also qualify for additional grants). Some provinces offer additional education savings programs that work in conjunction with an RESP.
• It isn’t just for university - colleges, technical training institutions, correspondence courses, even out of country programs often qualify.
• The CESG is only for kids under 18 and there is a lifetime maximum of $7200. Best to start early if you want to max out the benefits, although there are some rules to catch-up if you get started late.
• There are no tax deductions for contributions (unlike an RRSP) and there is no tax on contributions when withdrawn. Grant funds and any profits from investments are considered income and taxable when withdrawn, but students normally have a low tax rate so the effects can be minimal.
• The funds can be used for a wide variety of education related expenses - food, transportation, tuition, books, computers… and a lot more!
There is a ton of information out there on the ins and outs of RESPs and it can get a little tricky if you have a couple of kids. A good place to start is the government website. School starts in a week or so and your kids will be inching another year closer to graduation, so it's definitely the season to think about their future education.
A great article for both parents and their offspring about the merits, pitfalls and best practices of providing financial support to help your kids get into the housing market.
Financial checklist for 2021.... or 2022... or any year!
This is a great 3-minute read with excellent advice. You may have checked a few of these already and there are still four months left to go in 2021, so why not check them all out and see what you can do to finish the year financially fit!
Pandemic spurs debt reduction - will the trend continue?
Stats Canada reports non-mortgage debt dropped significantly during the pandemic, especially among those with the lowest credit ratings (and highest debt cost). Are Canadians finally figuring out the evils of high-cost debt or is this trend already in reverse as the pandemic subsides?
The fundamentals of a stock market crash
Markets are at record highs and with each passing day we hear the pundits claiming a crash is imminent. But what's behind a stock market crash, what triggered some of the well-known crashes, and what do investors do when the crash comes?
Commission free trading arrives at Canadian banks
The battle for your investment dollars heats up as Canada's sixth largest bank, National Bank, becomes the first to offer zero-commission online trades of Canadian and U.S. stocks and ETFs via its direct brokerage.
Relying on CPP and OAS to get you through retirement?
A good summary of CPP and OAS covering how much you may get and what happens if you delay receiving from 65 to 70. Either way, you will see that relying on these as your sole source of retirement income is not really a viable option.