Be Ready for University When Your Kids Are

Fred: Welcome to the Scotiabank “Find the Money” podcasts. I’m Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These monthly podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of your money. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

In this month’s “Find the Money” podcast we’ll be talking about how you can save for your children’s education and get supplementary government funding that can add as much as 20% to your savings. With me today to explain the benefits of a Registered Education Savings Plan is Howard Kabot, National Director of Financial Planning.

Howard, with the cost of education rising and with so many other pressures on family incomes today, most parents are finding it very hard to save for their children’s education. Here in Canada, what’s the best way to tackle this problem?

Howard: An RESP or a Registered Education Savings Plan is the best place to start. By the time today’s three year-old is ready for college or university, annual tuition costs for books etc. for a four-year program could be well over $25,000, and nearly, $70,000.00 for a student who’s going to attend school away from home. That’s why we have Registered Educations Savings Plans. These are tax-advantaged plans designed to grow long-term, tax-free. While RESP contributions are not tax deductible, like for example RSP contribution are, RESPs allows savings to compound and grow tax free until the child is ready to go full time to college, university or any other post-secondary education institution.

Fred: How much can families contribute?

Howard: There used to be an annual limit of $4,000 per child but in the last federal budget this was taken away and now there is a $50,000 life-time maximum per child. So that money can be contributed at any point along the child’s life for a secondary education. For example, if a parent was to contribute $2,500 a year, that’s about $200 a month, from a child’s birth to age eighteen; they would have about $45,000 accumulated by age eighteen. And the money itself would grow to over $89,000 assuming a 7% annual return. So that’s quite significant… even if you were only to contribute for example, $100.00 a month you would still wind up with over $43,000 in eighteen years. It’s important to note that anyone can open up an RESP, parents, grandparents, aunts, uncles, friends, etc. If they want to do that they can start with an individual plan that’s just for one beneficiary or a family plan for all children in the family. For family RESPs, the contributor, the parent or the grandparent etc., must be related by blood or adoption to the beneficiary.

Fred: So let’s talk about the government, what about the government’s contribution to your funding, the Canada’s Education Savings Grant?

Howard: Yeah, this is really important. This is really the federal government giving all children who qualify, money for their university costs. So it’s available to anybody who has an RESP open, where contributions are being made. The way it works basically is that the government will pitch-in or contribute an extra 20% on what’s being contributed by the parent or grandparent on the first $2,500. Depending on a families’ annual income, they may also be eligible for an additional amount on the first $500.00, but that’s income tested.

Fred: I presume this is available to help families with lower incomes.

Howard: Yes, that’s precisely the intent of this extra funding. The amounts that are available for lower income families apply to the first $500 contributed to an RESP. So, for example, for children from families with incomes below $37,000 they, of course, will get the 20% basic CESG, but on top of that they will get an extra 20%; and then for children of families with incomes between $37,000 and $74,000 they too will, of course, get the 20% basic grant and then they will get an extra 10% on top of that.

Fred: Howard, I’m sure a lot of families wonder what would happen to this money if their child decides against post-secondary education.

Howard: Yes, this is something that we’re asked about quite a bit. It is a concern for some contributors. It’s important to note that the funds in the RESP do belong to the contributor, the parent, grandparent, etc.; and for example, if the intended beneficiary is not going to go on to post-secondary education then the contributor, the parent, grandparent can select another beneficiary for example, another child or another grandchild can benefit from the use of the funds. They can also take the money out tax- free. So any of the original money being contributed into the plan can always be taken back without any problem. Finally they can take the income out, but the income will be taxed at their marginal tax rate plus another rate on top of that, usually a 20% penalty. Also if they want they can also transfer the earnings to their RSP if they have the RSP contribution room. But you have to remember that when a withdrawal is made from an RESP for non-educational purposes the government grants those CESGs that were being donated, if you will, by the government have to be returned. So that money will not go to you or to your children.

Fred: So how does someone go about applying for a Registered Education Savings Plan and the Canadian Education Savings Grants?

Howard: The easiest thing to do is to go into your local bank branch, they can set-up an RESP account for you and they will certainly help apply for the Canada Education Savings Grants.

Fred: I wish they had this kind of thing when I was of the age where I was thinking about what I wanted to do with the rest of my life and my education. Howard, thank you for explaining to us how the RESP and Canada Education Savings Grants work; and thank you for joining us this month. I hope you return for next months’ podcast. And for more information, please drop by your local Scotiabank branch, we’d love the opportunity to talk with you.