RESP Best Bet For Most Families
There are four basic ways to pay for your child’s (or grandchild's) post-secondary education. Another option, which I endorse, is to make it clear to them from day one that they will be paying for it themselves
OK, never mind. Here are the other four:
1) Pay at the time out of after-tax dollars. This is not the most efficient, and will only work if you plan to be making a lot of money when they start school or be willing to sacrifice other things then.
2) Contribute to an RESP, which provides a 20% government grant and tax sheltering on the growth. It is also a way to set aside money that is clearly earmarked for education. More on the pros and cons later.
3) Put money away systematically into a non-registered investment account or a formal "in-trust" account, targeted for education. If it is the parent’s or grandparent's money, then interest and dividends earned on this account must be declared each year on the tax return of the contributor. However, capital gains are claimable by the child. (On the other hand, all investment income on any money that the child earns, inherits or receives as "reasonable" gifts on special occasions is taxable to the child.)
“In-trust” accounts are actually fraught with complications. We'll cover those in a future article.
4) Buy a permanent (whole life or universal life) insurance policy on the life of the child. This can work, and has many other advantages, but I don't recommend it as the primary education savings tool. However, it can provide life insurance at a low rate, substantial cash value in the policy by age 18, and guarantee the child's future insurability. These are all valuable benefits, but they are generally lost to cash in the policy for education.
For pure education savings, I give the nod to the RESP for most families. The 20% Canadian Education Savings Grant (CESG) on the first $2,500 per child per year means an extra $500. If invested at 8% each year, the grant alone will be worth over $18,000.
The tax sheltering on the growth also helps. The growth will be taxable to the child as the money is withdrawn while attending university or other post-secondary education, but the child will generally be in a low tax bracket that time, often paying no tax at all. The original capital that you contribute can be withdrawn tax-free at any time.
For many people, the biggest single advantage is the discipline and commitment such a plan provides. If you can afford $208.33 per month, you can have over $110,000 put aside for education by the time the child is ready to start school. (If you get a 10% return, the value will exceed $135,000.) That money will continue to earn investment income until spent and should provide a very good start on anything but an Ivy League university.
If you have more than one child, we suggest a family plan RESP, which allows you to allocate the contributions and withdrawals to the different beneficiaries, as needed.
When it comes to taking out the money, which some of you will be doing this month, you will need the university to provide “Proof of Enrolment”, which is a little more formal than your tuition receipt. Remember that a number of expenses are eligible education expenses, including tuition, room and board, textbooks, laptops and virtually anything directly related to education.
If you need more detail on any of these items, drop me an e-mail or go to www.hrsdc.gc.ca and follow the links through Learning to get to RESP and CESG. (You can say “no” to the offer to join the government’s online panel.)
Now, hit the books, kids!
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays in the Winnipeg Free Press. You can e-mail him at dchristianson@wellwest.ca.