Updated: Apr 19, 2019
For many parents the greatest joy they can have in life is seeing their children succeed. As any of you who are parents would know, one of the best ways to help your children or grandchildren achieve their own success is to help ensure that they are getting a great education, enter education savings planning. The question often then arises, how much should I save and what is the best way to do so? Allow me to present the benefits of the Registered Education Savings Plan.
Before you open up any sort of savings accounts to help out your children or grandchildren you must first decide what level of support you want to provide them. Many of my clients have asked me in these situations “what is the right amount to give?” The answer is simple, it is completely up to you. There are no wrong or right answers. I have clients who feel that their children should provide completely for themselves as they will appreciate their education more if they pay for it on their own. I have other clients who feel they should pay 100% of education costs for their kids because they don’t want the cost of education to be a deterrent for them to reaching their potential. The truth of the matter is that it is completely up to you to decide what you think is best for your children in their specific situation based on the life lessons you want to teach them. Ah, the beauty of parenting. Once you have decided the level of support you want to provide (percentage of costs you would like to cover) the next step is find out how much you need to put away on a monthly basis to achieve your goal. As with anything in the world of personal finances and investing, the earlier you start the easier it is.
Registered Education Savings Plans or RESPs are a great tool for education savings because the governement will match a portion of your contributions utilizing the Canada Education Savings Grant. Your child can qualify for the CESG until the end of the year in which they turn 17 years old and there is a lifetime limit of $7200 which can be granted per child. Grants are awarded as a 20% match for contributions you make into the RESP account with an annual maximum of $500. Therefore, in order to maximize your grants annually you need to contribute $2500 per year up until the $7200 has been credited. There is also a learning bond which you may be eligible for depending on your income level and the number of children you have. For example if you have 1-3 children and your income is less than $46,605 then you may be eleigible for an additional $2,000 per child from the Canada learning bond.
Contributions, grants and bond money will grow in the RESP tax deferred and withdrawals are taxed in the hands of the beneficiary (your children or grandchildren) when the money is withdrawn. The benefit of this is that generally a student’s income is quite low and they will pay little to no tax on these withdrawals.
Genereally speaking if you have more than one child, family RESPs are recommended since they offer the flexibility of combining two RESPs into one and then allocating the funds in the RESP to either child as you deem appropriate or based on their different needs. For example if one child goes to med school and the other does a basic Bachelor of Arts, the med school student will require more funding and can utilize contributions and grants from their sibling that would go unused.
Once you have decided the level of support you want to provide the next step would be to run some calculations to determine how much you need to save to maximize out governement benefits and investment savings. There are many calculators online that will do this for you and we certainly make it a part of our planning with our clients. Let me share an example for your reference:
5 year old child looking to attend university at age 18 in Manitoba.
Parents want to provide for 4 years of tuition and not provide for anything further, including books or residency
Estimated annual rate of return of 5% in investments
No current education savings
Based on this scenario we anticipate that the inflation adjusted tuition costs for the child will be $33,218 in total. With 156 months until the child goes to school we calculate that the parents should save $124 per month which will deliver $27,065 of contributions (plus growth) along with $6,157 of grants totalling $33,218.
There are a lot of great programs available to Canadians and a lot of grants which unfortunately go unused by most. It is important to understand all of your goals and then evaluate the best method of achieving your goals in order to maximize the opportunities available for you and your family. The RESP program is just one great example of this, but there are many more. When the opportunity is available to achieve your goal by using less of your own money and more of someone else’s especially the governements, make sure you take advantage.
- Grant White, CIM, CFP®
Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
Industrial Alliance Securities Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Securities is a trademark and business name under which Industrial Alliance Securities Inc. operates.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.