Derek, how can I save for my child’s education?
As summer quickly fades away, kids are getting ready to head back to school to fill their heads with knowledge. Your hard earned dollars have bought all the supplies they need as their backpacks are packed to the top. In the midst of this spending it’s worth taking a moment to think about saving for their future education, well beyond the halls of the local elementary school.
It is no secret that post-secondary education can be costly. Recent studies estimate the average cost to be $6,000 per year which only includes the price tag for the classes itself, and not living expenses. There are many factors which can balloon this cost even higher. The reality is that many students leave with a massive burden of debt. One way to help ease this burden is to begin saving using a Registered Education Savings Plan (RESP).
The RESP is a government plan that helps family members save for post-secondary education. Part of the plan includes grants whereby the government deposits additional funds to the RESP to help with the burden of future payments. Understanding how you may benefit from this plan can help with your savings goal.
The Canada Education Savings Grant (CESG) is 20% of whatever you’ve contributed in a calendar year, up to a maximum of $500. Said another way, if you were able to save $1,000 this year you should expect a government grant of $200. You get the maximum grant if you contribute $2,500, anything more than that generally won’t attract any excess grant. Over the life of the plan, the maximum grant you can collect is $7,200, which can go a long way in helping pay for future costs.
Depending on your family’s income you may be able to attract additional grant dollars. If you’re currently receiving the National Child Benefit you may also qualify for the Canada Learning Bond (CLB) which offers an extra $500 at opening plus $100 for each year that you remain eligible.
You may also have the opportunity to receive some of your missed grant, particularly if you didn’t make the maximum contribution. A wealth advisor can provide some more specific advice on how this can be done and what your options may be. In short, even if your child is already in their teens you may still have some options to build up some grant dollars quick.
One important note is that any money you put into a RESP does not create a tax deduction (as it would with the Registered Retirement Savings Plan, or RRSP). The money inside the RESP grows tax-deferred until it is withdrawn. Depending on how the funds are withdrawn will determine how the funds are taxed.
If you’re withdrawing funds for educational purposes you may be able to access the principal, grants and interest. The grant money and interest is withdrawn and taxed in the hands of the beneficiary (student). While it does create taxable income, it is generally expected that most students do not have substantial income and therefore are in a very low tax bracket, or possibly paying no tax at all.
If you’re withdrawing funds for reasons other than education, you are likely going to lose the grant money, along with paying a punitive tax rate on any interest earned. With this said, you can take back your principal with no implications as it was tax-paid money to being with.
With the possibility that your child may not attend post-secondary you may also have the option of moving some of the funds from the RESP to your RRSP so long as you meet the criteria. Keep in mind that their educational choice doesn’t necessarily need to be a university or college; various trade schools and other institutions may qualify.
While the cost of raising children is indeed substantial, setting aside a few dollars a month can start to build up the RESP. Along with your deposits, you can expect grants and interest which will add up over time and help with those incoming and inevitable bills. To open a RESP contact a qualified wealth advisor or your financial institution. Finally, please note that we are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.
Derek Fuchs, Senior Wealth Advisor, Scotia Wealth Management