By: Jasmine Miler
Bankrate.com
May 2004
The most expensive gift you'll ever buy your child is probably a post-secondary education. Chances are it will also be one of the most useful presents -- university grads earn more on average than those without a degree -- but it will cost you dearly.
Adrian Mastracci, investment counsel at Vancouver
based ‘fee-only’ KCM Wealth Management, says, "With a family plan, if one child doesn't go on to a qualifying post-secondary institution, you can transfer the income earned to a second beneficiary, as long as they are related to the subscriber by blood or adoption.”
How much exactly depends on many factors: will your daughter live at home while she learns to write computer software? Will your son have a part-time job while he studies the classics? No matter what the answers, the final tally for a post-secondary education will be more than you can fathom right now.
"In 2020, a university degree will cost $96,000," says Michele Benson, group product manager of needs-based solutions and investment plans for Bank of Montreal in Toronto.
Before you freak out, take a deep breath. It is a lot of money, but there are some great savings options available. Here's a rundown of the best ways to save for your child's education:
Registered education savings plans (RESPs)
There isn't much free money around these days, so when you see some, pounce on it. With an RESP, you save for your child's education costs and the federal government helps out with a 20 percent Canada Education Savings Grant (CESG) on the first $2,000 you contribute each year.
You can sock away as much as $4,000 annually, with a lifetime maximum of $42,000 per child. You can open a plan anytime for a beneficiary 21 or younger, but the CESG is only paid until the beneficiary is 17. The maximum grant paid in any one year is $400, which can turn into a gift worth $7,200, the lifetime maximum that can accumulate on behalf of any one child.
You can open a plan as soon as your child has a Social Insurance Number, but contribution room can't be carried forward. So even if you can't afford the maximum contribution right now, you should still start saving now.
"You don't get a tax deduction for your contributions, as you do with RRSP payments, but your contributions grow tax-free until the funds are withdrawn," says Adrian Mastracci, of KCM Wealth Management Inc., in Vancouver.
That's the second advantage of RESPs: tax deferral. When the income is withdrawn from the plan, it is taxed in your child's hands -- not yours -- so presumably there will be less tax to pay since she'll be in a lower tax bracket than you when she withdraws it.
Parents and grandparents can open two kinds of RESPs for their children or grandchildren: a family plan or an individual plan. Non-family members, including aunts, uncles and friends, can only open individual plans. "With a family plan, if one child doesn't go on to a qualifying post-secondary institution, you can transfer the income earned to a second beneficiary, as long as they are related to the subscriber [the parent or grandparent] by blood or adoption," says Mastracci.
Even if you have only one child now, you can still open a family plan. Some individual plans can be converted to a family plan, while others cannot, so check with your provider.
All RESPs must be closed after 25 years, which is not usually a problem unless your child takes time off before or during her post-secondary studies. Regardless, all income from the plan must be withdrawn after the 25th year, so plan ahead as best you can.
Invest RESP funds aggressively early on
You can open an RESP at your bank or through a financial advisor and choose whatever mix of investments you like: stocks, bonds, mutual fund units, etc. Unlike RRSPs, there are no foreign content restrictions on RESPs.
"RESPs tend to run a little more aggressive than personal portfolios," says Mastracci. He says most Canadians are happy with a 60-40 equity to fixed income mix in their RRSPs. But with RESPs, that ratio should be closer to 70-30.
That's a good ratio if your child is at least seven years away from going to university. If your time horizon is shorter, you'll want to be more conservative. Mastracci suggests choosing index funds and exchange traded funds (ETFs) for the equities component of the plan to minimize management fees.
"Since you can only contribute a maximum of $42,000 to the plan, a 2 percent to 3 percent management expense ratio will really make a difference," he says.
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