Saving for higher education
Major in RESP management.
Post-secondary education in Canada isn't cheap. Factoring in living away from home, a four-year undergraduate degree can be as much as $80,000. That's where Registered Education Savings Plans (RESPs) come in. They allow you to start saving years before the tuition bills start rolling in. But like any investment, they need to be managed wisely.
First, RESP 101: the basics.
An RESP, like an RRSP, is a plan provided by the Canadian government, in which you can contribute funds and the money grows tax-free. There is no annual contribution limit for an RESP, but the maximum lifetime amount is $50,000.
If your child is 17 or younger, the federal government's Canada Education Savings Grant (CESG) tops up your RESP contributions by 20% on the first $2,500 contributed annually, up to a lifetime maximum of $7,200 per child. If you miss a contribution in any given year, the unused CESG can be carried forward and made up in the future.
There is also the BC Training and Education Savings Plan (BCTESP) grant which will provide $1,200 for your child's RESP with no matching or additional contribution required on your part. Your child must be born in January 2007 or later and be a B.C. resident; you can apply for the BCTESP grant any time after your child's sixth birthday up to the day before their ninth birthday.
With a RESP family plan, you can name more than one child as a beneficiary of the plan. The benefit of a family plan is that if one of your children decides not to attend a post-secondary institution, the funds in your RESP can be used for siblings. In a family plan, the named children must be your child, grandchild, great-grandchild or sibling, by birth or adoption.
Individual plans allow for only one child to be named as beneficiary; however, they don't have to be related to you. With this plan you can also name another beneficiary if the one you've saved for decides not to attend school, but the grant amounts may have to be returned to the federal government.
Strategy 201: treat their RESP like your RRSP.
You should manage your RESP portfolio just as you would your RRSP, looking at timelines, risk profiles and returns. Choose from high interest savings accounts, traditional term deposits that guarantee both rate and principal, market-growth term deposits that guarantee your principal but link the rate potential to stock market performance, or other higher growth options such as mutual funds* or equities*.
A very basic investment philosophy is quite straightforward: when the kids are young, invest for growth. Should markets dip, you'll still have time to recover. Remember though, your time horizon is much shorter than with an RRSP. Children grow so quickly…you'll want to keep an eye on your fund and rebalance it to become more risk-averse as high school graduation approaches.
TFSAs can play a role.
While the Tax-Free Savings Account (TFSA) doesn't qualify for government grants, it does offer valuable flexibility that might supplement your education savings plan. One way to combine the power of a TFSA and RESP is to put $2,500 into an RESP each year to generate the maximum CESG of $500. Then invest any additional funds in a TFSA to earn tax-free interest which can go to your child, or if they decide not to attend – stay with you. It's important to remember that TFSAs can't be opened by anyone under the age of 18, and TFSA contributions can't exceed the holder's annual contribution limit.
Cashing out takes a little time.
Withdrawing money from an RESP is a little more involved than an RRSP. You'll need to submit proof of registration at a post-secondary institution before funds can be released, which may take a few days to obtain. So just be sure to leave yourself time.
Encourage your kids to help.
When your kids invest their own money, any earnings are taxable to them. So if they have a part-time job, you can cover their spending money and they can put whatever they earn into their own RESP.
When it comes to saving and paying for school, there's a lot to study. Your financial advisor has the knowledge and experience to help you determine the most appropriate and tax-efficient way to save for – and spend – your child's educational savings.
How much is enough?
Our easy-to-use calculator can help you map out your education savings plan.