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By Nancy Carr
The Canadian Press
Thursday, August 26, 2004
Also published in:
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Toronto Star
Friday, August 27, 2004 |
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Regina Leader-Post
Friday, August 27, 2004 |
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Calgary Herald
Saturday, August 28, 2004 |
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Montreal Gazette
Monday, August 30, 2004 |
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Windsor Star
Monday, August 30, 2004 |
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St. Catharines Standard
Monday, August 30, 2004 |
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Ottawa Sun
Monday, August 30, 2004 |
TORONTO -- As students prepare to return to classes in September, many parents realize that in a few years they won't just be paying for notebooks and knapsacks, but possibly tuition and textbooks for their kids' post-secondary education as well.
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, “Often it’s advisable for parents or grandparents to create a family RESP. That way, if one child doesn't end up going to college or university, a sibling can use the funds.”
And while most parents have heard about plans to save for their kids' college or university education, they're a little "foggy" on the details, according to Bradley Roulston, a certified financial planner.
"But the buzz is extremely high, and I think that people really want to look after their kids," Roulston said.
Since 1998, most of that buzz has centred around a government grant for up to $400 a year when contributions are made to a child's Registered Education Savings Plan.
That 20-per-cent grant, on contributions up to $2,000, can go a long way to saving for a four-year undergraduate degree, which currently costs about $60,000 for tuition and living expenses and could hit $100,000 in 15 years with inflation and continued tuition hikes.
Unlike registered retirement savings plans, contributions to RESPs are not tax deductible for the parent or other contributors.
But RESP investments can grow tax free until the student needs the funds, at which time taxes are paid by the student, who is usually in a very low tax bracket.
FAMILY PLAN
RESPs can be set up for an individual child but many advisors, including Adrian Mastracci of KCM Wealth Management Inc. in Vancouver, often advises parents or grandparents to create a family RESP.
That way, if one child doesn't end up going to college or university, a sibling can use the funds. The biggest such RESP he manages is worth about $150,000, he said, for a family with several children.
"If nobody goes on to school, then you still have a couple of choices," said Mastracci, including transferring the plan, minus the government contributions, to the parents' RRSPs, if they have the room, or collapsing the plan and paying the tax on the income.
One important way in which RESPs differ from RRSPs is that the investment timeline is usually much shorter -- about 18 years if the RESP is started when a child is born, or less than that if contributions begin when the student is closer to graduating from high school.
For that reason, Mastracci said, investments within the plan, such as GICs, bonds, mutual funds or stocks, don't have to be "terribly conservative" when the students are still in diapers or grade school.
"But as you get closer, let's say within two or three years of the first child wanting to perhaps use it, you should then change the strategy of the investment" by investing with less risk.
Besides, Roulston said, even if funds in an RESP are invested in a GIC where they are earning just a three per cent return, the rate of return is much higher after adding government's 20 per cent, up to a lifetime maximum of $7,200.
"So it's like an actual 23 per cent rate of return on that year, which is pretty cool," Roulston said.
When a student finally goes to make use of the savings that have grown in an RESP, parents can rest easy knowing that the cash can't just be blown on beer and road trips.
Every time the student needs money related to their education from their RESP, they have to supply receipts to the bank or the company that administers the plan.
"You can't just say, `I want to take out $4,000,"' Roulston said.
The student or parent can either pay for the item and then get the refund from their plan or request an advance once they get an invoice from the college or university for how much they'll need to fork over for big-ticket items such as tuition and accommodation.
The financial companies that Roulston's RESP clients have worked with usually process the claims within about a week, meaning the student wouldn't be out of pocket for long.
Some families, however, find the kind of limits on where RESP funds can be spent to be too inflexible, in which case they can set up an in-trust account but forego the government grants.
Roulston stressed it's natural for RESPs to come to mind during the back-to-school season, but he urged parents not to run out and start making contributions in a panic before assessing their own overall financial plan.
"I would highly recommend that parents look after themselves first because if worse comes to worst, a kid can either borrow or they can take a year off and work or get a part-time job or go to a school that's closer to home and save some money," said Roulston.
"But if parents sacrifice their retirement, it's like an extra burden for a student who goes to school to have to start working and then they pay for their parents because their parents didn't do any planning for themselves," said Roulston.
RESP FACTS
What is an RESP? An education savings plan registered under the Income Tax Act.
How is it taxed? Contributions grow tax-free. Withdrawals are eventually taxed in the student's hands, usually at a low tax rate.
How much can be contributed? Up to $4,000 a year, with a lifetime limit of $42,000.
How much is the government grant? The Canada Education Savings Grant of 20 per cent, up to $400 per year and $7,200 over a lifetime, is paid into RESPs by the federal government.
Who can contribute to a plan? Anyone can be a subscriber for a child or children's plan, but usually it's parents, grandparent or other family members,
What can the savings be spend on? Expenses related to post-secondary expenses, including tuition, fees, textbooks, room and board.
Who sells plans? Banks, financial institutions and private companies.
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