The gift of education is one of the greatest gifts we can give to our children or grandchildren. This gift, however, may come with a hefty price tag.
There are several ways that parents can choose to deal with the cost of a child’s post-secondary education. If you decide that you want to help with your children or grandchildren’s education, the sooner you can begin setting aside money and planning for those education costs, the better positioned you will be when they get there.
To help set your child’s education fund off in the right direction, here are 10 tips to consider.
1. Planning for education costs
Today, many young parents are struggling to make ends meet. Paying the household bills, including the mortgage, leaves little left over for education planning. Contributing to a Registered Retirement Savings Plan (RRSP) provides a deduction from taxable income whereas a Registered Education Savings Plan (RESP) does not provide this immediate tax relief.
The first tip is to set up a plan to determine how the education costs will be covered.
Some parents have not created an education plan. What happens in these situations is either the parents adopt a “pay as they go” approach or may expect a child will be responsible for their own education costs. This could be funded through the child’s personal savings (if they have any), receiving scholarships (if possible), using student loans, or getting a part time job.
With whichever method parents choose to assist their children, it is important to keep a mental note of the potential costs for budgeting your cash flows. Having a plan in place for education costs. Having these conversations when your children are still young allows the flexibility and time to action the education plan.
2. Contingency plan for education
Like all plans, your future costs should also factor in the unexpected. An unanticipated disability, death, divorce or other family emergency may interfere with your children obtaining an education. In many cases, purchasing adequate insurance may offset some of the risk if a supporting spouse were to become disabled, suffer a critical illness, or pass away.
The cost of term insurance for parents is very low and, in my opinion, worth considering in most cases. We will typically prepare a term quote for our younger clients after doing a needs analysis. The two most common items on a needs analysis typically cover debt (i.e. remaining mortgage balance) and future education costs for minor children.
3. Take advantage of the ÎÚÑ»´«Ã½ Education Savings Grant (CESG)
The government provides a 20 per cent CESG for contributions of up to $2,500 annually. Obtaining an immediate return of 20 per cent, or $500, should not be missed.
If you have missed RESP contributions early on, then the government will even give you the flexibility to claim the CESG for up to two years – if you contribute $5,000 in a single year you will receive a $1,000 CESG from the government.
The lifetime total benefit for the CESG is $7,200 that the government will give for your child’s education, provided you have mapped out a plan to contribute $36,000 over 17 years.
4. Income splitting benefits of RESP
Normally, when you give your minor child money, interest or dividends earned on this money is taxed as if you had received the income (i.e. income is attributed back to the parent and taxed in their hands). Capital gains income does not attribute back to the parents. The attribution rules do not apply to RESP contributions either.
As well, any interest, dividends or capital gains earned within an RESP are taxable in the beneficiary’s (i.e. child’s) hands, so long as the funds are used towards their post-secondary education. Additionally, the income earned with an RESP is not taxed until it is withdrawn to pay for the beneficiary’s post-secondary education.
Both the tax deferral and income splitting aspects are particularly beneficial if parents have high taxable income. If the accumulated interest, dividends and capital gains are not used towards the beneficiary’s post-secondary education, then these amounts will be taxed at the subscriber’s (i.e. the parent’s) regular income tax rate, plus an additional 20 per cent penalty tax.
The lifetime maximum to contribute into an RESP is $50,000 per child. Although the extra $14,000 ($50,000 - $36,000) may not attract the CESG noted above, there are both income splitting and deferral benefits to consider.
Once the RESP beneficiary has enrolled in a full-time or part-time qualifying post-secondary education program, money can be withdrawn from the RESP to help cover the costs. There are two types of withdrawals:
1) Post-Secondary Education (PSE) withdrawal – These are a return of the contributions made to the RESP that aren’t taxable.
2) Educational Assistance Payments (EAP) – these include various government grants (federal and provincial, where applicable) and the ÎÚÑ»´«Ã½ Learning Bond (CLB), as well as investment earnings on the grants, CLB, and RESP contributions. These amounts are taxable to the student beneficiary of the RESP.
For full-time or part-time studies, EAPs are limited to a maximum of $5,000 ($2,500) during the first 13 consecutive weeks of enrollment. The limit won’t apply after that time unless the student leaves their studies and doesn’t re-enroll in a qualifying educational program for 12 months.
5. Planning contributions
We encourage clients who open an RESP for a child to contribute $2,500 every year. There are significant benefits with compounding investment returns. Lump sum contributions for higher-income parents work best, as you can do a contribution early each year.
Alternatively, setting up pre-authorized contributions (PAC) is another easy way for a family to get started with automated forced savings each month. When an RESP is set up, we can also set up the PAC at the same time.
6. Grandparents opening plans as the subscriber
Many grandparents are proud to start the next generation off on the right foot. Funding an RESP is a great way to help both their children and grandchildren. Godparents, friends and other family members may also be the subscriber of an RESP for a child. Nearly half of the RESP accounts we have opened are funded by grandparents.
RESP withdrawals can be structured in different ways. In some cases, grandparents may want their original capital back (if they require it), and the grandchild can receive all the CESG and income within the plan.
When a grandparent opens an RESP for a grandchild, we will recommend that they speak with their lawyer to add a paragraph in their will that names another individual as the subscriber, typically the parent(s), if they were to pass away.
A grandparent cannot open an RESP for a grandchild unless the parents sign a consent form. The key point to note with setting the account up this way is that the grandparents are the subscribers and ultimately control the account and future withdrawals.
7. Grandparents gifting funds to children
It can be a little trickier when two eager sets of grandparents both want to open an RESP. In these situations, I would typically recommend that the RESP be opened with the parents as the subscribers. The grandparents can each gift money to the parents; the parents can then contribute the funds into the RESP. When the gift approach is used, the parents are the subscribers, not the grandparents. The parents would ultimately control the account and future withdrawals.
When we meet with grandparents to discuss the option of gifting money to the parents, we also offer to assist the parents. We can easily link the RESP account to reduce investment counsel fees which we refer to as “householding.” We have written a past article on householding: .
The nice benefit of this option is that the grandparents can transfer money from their non-registered investment account directly into the grandchild’s RESP. We can then meet with the parents and communicate with them regarding the contributions (ensuring they are within the government thresholds), and investment options. In some cases, the contributions are shared between grandparents and parents.
8. Individual versus family
An individual plan is set up for the benefit of one beneficiary. A family plan is set up to allow contributions to be made for more than one beneficiary.
The one condition is that all the beneficiaries must be related to the contributor(s) by blood, but not nieces or nephews. Contributors decide on how the plan’s assets are invested along with the timing and amount of the education payments.
The main benefit of a family plan is that RESP income does not have to be paid out proportionately between beneficiaries. If one child does not pursue post-secondary education, the other beneficiaries may use the income for their education.
One common misconception is that you must have more than one child to open a family plan — that is not the case. If there is any possibility of the parents having additional children, then always open a family plan. There are no disadvantages to having a family plan with one child.
When we see parents with more than one individual plan, we will assist them in transferring these into a one family plan and communicate the benefits of doing so.
9. Choose the right asset mix
The name Registered Education Savings Plan may be somewhat misleading. While it is a “savings plan”, that doesn’t mean you are only limited to savings accounts or Guaranteed Investment Certificate (GIC) options. You have the ability to invest in direct holdings (i.e. stocks, bonds).
For our clients with RESPs, we have a discussion about their investment objectives, risk tolerance, and time horizon for the account to arrive at their optimal asset allocation (i.e. the percentage allocation between equities, fixed income, and cash). The asset allocation evolves over time, particularly the closer your child is to attending post-secondary university.
At this stage, the asset allocation often switches to have cash flow from the RESP for the next 12 to 24 months set aside in a cash equivalent.
10. Self-directed option versus pooled fund
There are different types of RESP accounts depending on the financial institution you visit. The two main types are self-directed plans and pooled programs. Our preference with any type of investment account is to keep things simple, low-cost, and flexible. This can all be achieved with the self-directed RESP option. Pooled programs may require a minimum deposit, regular contributions, and have various up-front and ongoing service fees.
We recommend anyone considering a pooled program to also explore the self-directed option and compare both for fees and flexibility. Too often, we see people rushing out and purchasing a pooled RESP program without understanding all the fees and features.
Many of the pooled options available have features that are unnecessarily complicated. Wherever you initially open an RESP, we feel you should have the right to move the RESP if you are not satisfied. With many of the pooled options, it is very punitive to transfer out of the program. With a self-directed option, you have complete flexibility to pick the underlying investments.
Opening an RESP looks different for every family based on their specific situation. Meet with your Portfolio Manager today to take a step in the right direction and open the discussion on setting up an RESP for your child or children. With regards to implementing any tax planning strategies, speak with your professional tax advisor about your particular facts and circumstances.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit .
