Planning for Children’s Education

A college or university education is crucial to success in today’s job market and will be even more so in tomorrow’s. It is estimated that 65% of new jobs created within the next year will require a post-secondary degree.

But while Canadian families are eager to give their children the benefit of higher education, tuition fees are increasing relentlessly. Four years of study at a typical Canadian university can cost around $16,000 for tuition and books. If a student lives away from home, the cost will be even higher.

Start saving when they are young

Children grow up quickly. All the more reason to start saving for their education when they’re still very young. If you begin early and invest on a regular basis, you can put the power of compound interest to work for your children. For example, a modest $200 a month in savings can grow to $60,000 by the end of 15 years (assuming an effective 7% annually rate of return).

One way to plan for your children’s education is to set aside a specific portion of your savings for that purpose. Alternatively, you can create savings programs which are in your children’s names. These may include a Registered Education Savings Plan (RESP) and an in-trust account.

Small amounts invested regularly can grow to a significant amount over time. An investment of just $200 each month can grow to $60,000 by the end of 15 years.

What is an RESP?
An RESP is a tax-sheltered investment plan specifically intended to help you pay for your children’s university or college education. You may contribute up to $5,000 per year per child to a lifetime maximum of $50,000.

RESP Benefits

1. Tax Savings
Although contributions to an RESP are not tax-deductible, the investment income which they generate (interest, dividends or capital gains) accumulates tax free until it is withdrawn. At the time of withdrawal, contributions are not taxed, only the investment income is taxed as a regular income in the student’s hands. Since a student is unlikely to have much other income, he or she can expect to pay little if any tax on the funds.

2. Canada Education Savings Grant
An RESP also receives a federal government grant for a child’s education. The Canada Education Savings Grant pays into an RESP a grant equal to 20% of the first $2,500 of an annual RESP contribution you make for each child under age 18. There is a maximum of $500 per child per year and a lifetime maximum of $7,200 in grants per child.

3. Multiple beneficiaries
You can name as many beneficiaries as you wish, and change them at any time.

4. Roll into an RRSP
Even if none of your beneficiaries enrolls in post-secondary education, you need not lose the income generated by your contributions. If the RESP is at least 10 years old, you can roll the income into your own or a spousal RRSP (up to a maximum amount) provided there is unused contribution room.

What is an in-trust account

An in-trust account is an investment account you can open on behalf of a child. As with an RESP, you accumulate savings through contributions to the account. The in-trust account is not eligible for any government grants, and the contributor has no right to recover the funds in the account since they belong exclusively to the child.

In-trust benefits
The in-trust account offers the benefit of income splitting. Until you child reaches the age of majority, you pay the tax on any interest or dividend income generated by the contributions, while your child pays the tax on any capital gains and on any reinvested interest or dividend income.

In contrast to an RESP, there are no limits on the amount you can contribute. If your child passes up post-secondary education, he or she can eventually use the funds for non-educational purposes.

Not just for parents
You don’t have to be a parent to open an RESP or an in-trust account. Grandparents, other family members and friends may also use these vehicles to save for a child’s education.

A Gift for life
Education is the key to future opportunities in life. You can help children on the path to success by making it possible for them to attend university or college. With the proper planning, you can relieve the financial burden that often accompanies, or even denies, this opportunity. Let a MC Wealth Management representative help you do the homework and give a gift that will last a lifetime.