Six Smart Ways to Save for Higher Education
A post-secondary degree may be pricier than you realize. Here’s how to save wisely.
It’s estimated two-thirds of job openings over the next decade will require a post-secondary education. The trouble? Higher learning is expensive and getting pricier all the time.
Statistics Canada reports average annual tuition for an undergraduate degree program in Canada rose 3.1% in 2017-18 to $6,571. That’s a 44% jump from a decade earlier, more than twice the rate of inflation.
Yet tuition is only part of the story. After you tack on the cost of books, food, transportation and housing expenses, a typical undergrad living off campus could spend nearly $20,000 to go to school in Canada this year.1 That’s in today’s dollars. You’ll likely need much more if your child finishes high school years from now, or you have multiple kids eyeing post-secondary studies.
Fortunately, the right planning can make the financial burden much lighter. Here are six ways to get the most out of saving for your children’s education.
1. Open an RESP
When saving for school a Registered Education Savings Plan, or RESP, is a hands-down winner. Why? Tax-sheltered growth and free money from the government are two reasons.
Income earned inside an RESP, whether interest, capital gains or dividends, remains tax-sheltered until withdrawn. Because withdrawals will usually be taxed in the child’s name, those funds normally amount to tax-free savings. While there’s no annual limit on contributions, there’s a lifetime limit of $50,000 per beneficiary.
Another feature that’s hard to beat? The Canada Education Savings Grant (CESG).
The basic grant equals 20 cents on each dollar you contribute to a maximum of $500 annually ($1,000 if you’ve carried forward CESG room from earlier years). You can receive up to $7,200 per beneficiary in CESG over the life of a plan. If your child’s a BC resident and born in 2006 or later, they may also be eligible to top up their RESP with a one-time $1,200 payment through the BC Training and Education Savings Grant.
If you have, or expect to have, more than one child, consider the added flexibility of a family RESP over individual RESPs. You’ll be able to allocate savings between children. That’s ideal if one child decides not to go to school, or another requires more of the funds.
Grandparents and RESPs
Grandparents have an edge when setting up a family RESP. A grandparent can add all their eligible grandchildren to one plan. A parent, on the other hand, can’t include nieces and nephews as beneficiaries.
Instead of opening an RESP themselves, a grandparent also has the option of giving contribution money to their son or daughter to start a plan for their grandkids. The advantage is the parent may transfer up to $50,000 in RESP earnings to an RRSP (contribution room permitting), should none of the beneficiaries go on to post-secondary school. Those accumulated earnings might otherwise be taxable if a grandparent no longer has an RRSP of their own to receive the funds.
2. Start saving early
If there’s one thing to remember it’s this: don’t wait to start saving. The earlier you begin, the longer your contributions and grant money have to grow.
Here’s an example. Starting when you child’s born, let’s say you contribute $2,500 annually to an RESP, letting you maximize the basic CESG benefit. Assuming your money earns a 6% annual rate of return, by the time your child turns 18 they’ll have $81,000 put away. Now, instead, say you wait until they’re 10 years old to begin saving. Even doubling your annual contributions to $5,000 to collect all the CESG available won’t make up for lost years of growth, leaving $19,000 less available for education.
3. Contribute regularly
Making annual RESP contributions early in the year will give your investment capital extra time to compound. Still, you may find your most convenient option is to simply arrange monthly deposits to your plan. Contributions of just over $200 a month will generate the maximum $500 CESG each year.
But, if you have the funds, is it better to forego periodic contributions and invest the full $50,000 lifetime contribution per beneficiary as a lump sum? Because your single deposit would soak up all the lifetime contribution room in the first year, the most CESG you could collect is $500 over the life of the plan. It’s best to sit down with your advisor to assess whether the added growth potential from making a single, large investment upfront in an RESP outweighs the loss of grant money, or if it’s better to funnel extra dollars you have to another savings option.
4. Right-size your risk appetite over time
Maintaining the right mix of stocks*, bonds* and cash when you invest in an RESP can be tricky.
If you have a decade or more until your first withdrawal, market volatility is less of a factor, so it can make sense to seek out stronger performance by favouring equities.
As the years pass and your child gets closer to post-secondary school, your investment horizon shrinks. Suffering a large loss with little time to recover can be devastating. That’s why it’s prudent to take some risk off the table by beefing up the share of fixed income investments like bonds and GICs, as well as cash.
Asset allocation takes more careful planning if you hold a family RESP, particularly if the beneficiaries are far apart in age. If you have an older child who will need the money shortly, consider keeping part of the RESP in cash and short-term investments, while leaving the rest in stocks to help maximize growth for a younger sibling still years away from high school graduation.
5. Look at other savings options
For most people an RESP should be the cornerstone of an education savings plan. But it won’t always be enough, especially if your youngster enters an expensive professional program like medicine or dentistry, pursues a graduate degree, or decides to study in the US or overseas. Another issue? If your child doesn’t go on to post-secondary education, you might be forced to repay the grant money or face tax penalties to withdraw funds from your plan. For these reasons it makes sense to consider additional options.
Tax-Free Savings Account. A minor child can’t open their own TFSA. But, you can save money for anything – including your child’s education – in your own plan, tax-free.
The beauty of a TFSA is its flexibility. Need money for tutoring or a school trip while they’re still in high school? Simply withdraw the funds. Or, use the money for another goal entirely, like helping your kids buy a home.
In-trust account. An in-trust account is a savings or investment account you open on behalf of a minor child. Unlike an RESP, there are no restrictions; you can deposit as much as you wish. Although dividends and interest will be attributed back to you for tax purposes, capital gains and income on re-invested earnings are taxable in your child’s hands, so they’re essentially tax-free. That makes capital gain producing investments like equities particularly attractive for in-trust accounts.
Still, there’s a major risk. The savings in an in-trust account are the child’s once they turn 19 (age of majority in BC), meaning they could use the funds any way they wish – it doesn’t have to be for education. An alternative is to create a formal trust to control how the money is spent. Doing so can be complicated and won’t be right in every situation, so ask your advisor to explain the pros and cons.
Life insurance. Paying premiums on a permanent life insurance policy can build savings to use for education or any other purpose. Once your child turns 18, the Income Tax Act allows you to transfer ownership of a life insurance policy to your child via a tax-free rollover, which they can tap to pay for school.
Help Your Kids Earn an 'A' in Personal Finance
Before your kids head off to higher education, make sure they don’t miss these important money lessons.
Have them contribute to their education costs. Even if your RESP is doing most of the heavy lifting, ask your kids to chip-in when paying for school. With a greater personal stake, chances are they’ll value their education more.
Set up an investment portfolio. Introduce your teen to investing by helping them purchase stock in well-run companies they follow. Or, go with a mutual fund holding shares in those businesses. For new investors, mutual funds offer broad diversification and professional management, plus you can set up automatic purchases in small amounts. Remember, there can be tax implications when investing for a minor, so speak with your Credential Securities advisor at BlueShore Financial first.
Let them practice handling a budget. For an older teen, beef up their allowance but give it to them less often. It will force your child to manage those dollars longer, giving them extra practice at deciding what’s important to spend money on and what they could do without.
File tax returns every year. Once your child has earned income, filing a tax return, even when they don’t owe tax, is smart. It will generate RRSP contribution room they’ll use to save tax once they’re earning more.
6. Having a plan is your best defense against rising education costs
At BlueShore Financial, we understand the challenges of saving for your children’s education. We’ll help you create a sensible plan that won’t force you to compromise your other financial goals. Speak with your advisor today.