Saving for Your Child's Education
I was at the Liquor Store this fall buying… I think it was beer that time, and the person assisting me with my purchase asked if I could discuss ways to save for your child’s education in the next column.
One of the options is contributing to a Registered Education Savings Plan (RESP), a savings plan registered in the name of your child into which money can be deposited and grow tax-free until he or she enrols in post-secondary education. These funds can be used for full-time or part-time studies in a college, university, trade school, CEGEP (in Quebec) or an apprenticeship program. When the funds are used, it will be the child, being in a lower tax bracket, not the parents that will be taxed on the investment income. The maximum lifetime contribution is $50,000 per child.
Another advantage of this plan is that the federal government offers grants to promote savings. The program is called the Canada Education Savings Grant (CESG) and it will deposit the equivalent of 20% of the money saved to a maximum of $500 per year into your child’s RESP. The year they turn 17 is the last year they can receive the grant and the lifetime maximum grant is $7,200 per child. The government also offers additional grants for low and middle-income families.
There is also another program called the Canada Learning Bond which is offered to lower income families available to children born in 2004 or later where an initial payment of $500 is received with additional payments of $100 per year up to 15 years for a total of $2,000.
There are three types of plans, family, individual and group plans. Grandparents and other relatives as well as friends can also open RESPs for children. The RESPs are offered by banks, credit unions, and certified financial planners. I would recommend an initial meeting with an advisor to discuss your goals and inquire about the costs and restrictions of these plans before you commit to one.
What happens with the RESP if your child decides to not pursue studies after high school? You will need to reimburse the grants your child received from the government and there will be a penalty as well as income tax on the investment income earned from the plan. These can be avoided by transferring the income earned into your RRSP provided you have the contribution room. To clarify, the contributions made are not taxed, only the income you earned on them. The RESP could also be transferred to the plan of a sibling.
The other options are to deposit the money into your own Tax Free Savings Account (TFSA) or open a non-registered account for your child. An advisor would be able to provide additional information.
The bottom line is that you should put money aside whether it’s $20, 50 or more per month. As long as you do it, the money saved will earn income and will be useful at a later date. If your child is not interested in pursing further education, then the money saved could help for a portion of a down payment on a house, for example.
The temptation to buy our children outfits and toys will always be there. Honestly, when they are under the age of eight, they usually do not pay attention to what their clothes look like. The only thing you need to let them know is that when grandma tucks their shirt into their pants, which are pulled up to their arm pits and then tucked into their socks, it is not an acceptable look! She may want to keep them warm, but …
Next time you’re tempted to buy an outfit or toy, question yourself as to whether they need it or not. If not, even if it is on super sale, put the money into their savings account. Every little bit counts.