With the rising costs of mortgage payments, groceries, gas prices and so on, many young parents are struggling to make ends meet — and finding there is little left to save for their children’s post-secondary education.
Parents wishing to fund their children’s education should take full advantage of every tool available to them, such as Registered Education Savings Plans (RESPs), and make sure they have a comprehensive education plan in place.
Planning ahead
It is important to plan ahead, and funding your children’s education is no exception.
Determining approximately how much your child’s education is going to cost is the first step in the process. It’s important to include costs such as housing, groceries and fees for extracurricular activities in this calculation.
From there, you can work backward and figure out how much needs to be saved and invested each year. In determining this figure, some parents realize that despite their best efforts, they will not be able to fund everything.
In these situations, it is important to discuss how the shortfall will be met. For instance, is the child eligible for bursaries and scholarships? Could extended family members, such as grandparents, provide additional support? Could the child work part time? Does their degree include a co-op or internship program that could provide employment in the summers? Are they eligible for student loans?
We strongly recommend that parents utilize an RESP to save for their children’s education and contribute $2,500 every year, if possible, to maximize the Canadian Education Savings Grant (CESG).
For those who can afford to do so, it makes the most sense to make a lump sum contribution early in the year. However, setting up a pre-authorized contribution (PAC) is also a viable option to ensure that savings are accumulating each month.
A few benefits of the RESP
One of the key benefits of utilizing an RESP to fund your children’s education is the Canadian Education Savings Grant (CESG). This grant provides a 20 per cent matching contribution for contributions of up to $2,500 per year in an RESP. This is essentially an immediate 20 per cent return on your $2,500 investment.
If you miss an RESP contribution, the government gives you the flexibility to claim the CESG for up to two years. This means you can contribute $5,000 in a single year and receive $1,000 ($5,000 x 20 per cent) from the government for any past years of missed contributions.
The lifetime total benefit for the CESG is $7,200, which the government will give for your child’s education.
Another benefit of the RESP is that interest, dividends, and capital gains earned within the plan bypass the CRA’s attribution rules. Normally, when you give your minor child money, and that money is invested, the interest and dividends earned are attributed back to the parent and are taxed in their hands.
An RESP provides an opportunity to give investable funds to a minor child without creating tax consequences for the parent. This is particularly useful if the parents are in a high tax bracket.
Grandparents
Nearly half of the RESP accounts we have opened are funded by grandparents. In these situations, there are a few considerations to be aware of.
For one, grandparents cannot open an RESP for a grandchild unless the parents sign a consent form. If the grandparents are set up as subscribers, it’s important to understand that they ultimately control the account and future withdrawals.
When a grandparent opens an RESP for a grandchild, we strongly 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.
Sometimes, both sets of grandparents want to open an RESP for the grandchildren. In these situations, we would typically recommend that the RESP be opened in the name of the parents. The grandparents can each gift money to the parents, and the parents can then contribute the funds into an RESP.
When the gift approach is used, the parents are the subscribers, not the grandparents, and the parents ultimately control the account and future withdrawals.
Different plan structures
There are two ways an RESP plan can be structured, either as an individual plan or a family plan. As the names imply, an individual plan is set up for the benefit of one person, while a family plan allows contributions to be made for more than one beneficiary.
The one condition for family plans is that all the beneficiaries must be related to the contributor(s) by blood. (Family plans cannot be opened for nieces and nephews.)
The key benefit to a family plan is that the RESP income does not need 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, but that is not the case.
There are no disadvantages to having a family plan with only one child. When we see parents with more than one individual plan, we will assist them in transferring these into family plans and communicate the benefits of doing so.
Beware of pooled funds
There are different types of RESP accounts depending on the financial institution you deal with, one of which is pooled programs. Our preference with any type of investment account is to keep things simple, low cost, and flexible.
Pooled programs may require a minimum deposit, regular contributions, and have various upfront and ongoing service fees. 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.
Preparing for the unexpected
Like all plans, you should try to factor in the unexpected and hedge against your risks. If a death, disability, divorce, or other unanticipated event were to happen in the family, it could interfere with your children obtaining their education.
For this reason, young parents should consider mitigating these risks with term insurance. Term insurance is a form of insurance that provides coverage for a predetermined term (i.e. five, 10, 20 years), and is typically inexpensive for young parents.
After reviewing our client’s situation, we often find that there are two things they need to insure against: covering debt (i.e the remaining mortgage balance) and future education costs for their children. We utilize our insurance specialists to determine the most appropriate term insurance for our clients.
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.
