How Do I Fund My Child's Education?

In my last article, we explored the tools that are available to Canadians to build and secure their retirement nest egg. We all know that, saving for retirement is a lot easier said than done. Once the paycheck comes in, it gets split seven different ways from Sunday. First and foremost, there is the mortgage/rent that consumes most of what we earn. Shortly after that expense, comes the bills to run the household, food, transportation costs, cell phones, and other miscellaneous expenses. These seem to be going up at a rate which our income does not follow. So, what happens when we throw in a couple of children to the mix? The financial pressure has caused families to become smaller than they were in previous generations. We have also moved towards dual income households being the norm. Additionally, children seem to be growing up faster than they have ever before, take it from me I have three little ones myself.

Every parent wants nothing but the best for their child. We want to give them the means to be able to pursue their hopes and dreams. These dreams normally come with a hefty price tag upfront which, more often than not, involves a higher level of education. The cost of education has risen by forth percent (40%) in the last decade, according to Statistics Canada. Now compare this to a Statistics Canada Report where the median income of Canadian households reached $70,336 in 2015, a measly 10.8 per cent increase from $63,457 in 2005. You can make the justification that these modest gains were a combination of the financial crisis in 2008, recessions, and more recently the collapse in oil prices. Ultimately, none of that really makes any difference if our savings took the hit. We cannot be jaded by our past experiences, only learn from what has happened and do things differently moving forward.

Let’s take a closer look and see what exactly is an RESP? What options are available to setup the RESP? How does a RESP work and what are the benefits or each kind of RESP plan? 

There are two main advantages of an RESP:

1) The most obvious is that it’s a savings vehicle to fund a child’s education. These funds can grow tax free until the child requires the money for funding their post-secondary schooling, up until the age of 36.

2) The added advantage is the Canada Education Savings Grant (CESG). The government will match 20 percent of any contribution made into the RESP up to a maximum of $500 per year, which equates to $7,200 over the lifetime of the account until the child turns 17 of age. Families with lower incomes have access to additional support know as the Canada Learning Bond (CLB). The CLB is applied for separately if the family income is relatively low. A child could receive up to $2,000, until they reach the age of 15.

You have the option to establish an individual RESP for each child. In this scenario, you will have to make separate contributions to each account also, each account can have its own specific investment products, so there is a little bit of flexibility. Personally though, I would recommend for families that have more than one child or are considering more than one child, a family RESP account. The family RESP acts like a pool of funds that can be distributed in any percentage to any one of the children that needs funding for their schooling. There are circumstances where some kids just do not want to pursue a higher level of education. In this case the children that do, have access to a larger portion. A family plan also reduces the cost of investing, since there is a larger pool to work with when buying or selling the investments held within it. A larger principle can be grown at once, there is less hassle with trying to portion out the household income to make contributions, and the government grants are combined within the same pool.

Alternatively, there is another option which is a group RESP plan. With this type of account, you are invested into a pool with a prescribed savings schedule, each group plan has its own set of rules around contributions and withdrawals. This option does however, dictate your investment schedule and it also hands over control of the account to the managed program. There is another drawback to this type of account when it comes to withdrawing the funds out. How much your child will receive when they request the withdrawal, will depend on how many investors with children the same age that are within the plan, are going on to post-secondary schooling in that designated year. The return of the principle invested is guaranteed at the time of withdrawal but what varies is the returns you have made on those investments. For instance, if your child forfeits going to school in their designated year, the investment earnings remain inside the pool and are split among the remaining plan members that are eligible to withdraw, essentially giving them a larger portion.

So, we now know that we have a few options as to how we can save for a child’s education. We also know what each of these options offers and what the stipulations are in place for each type of account. At this point most of my clients ask me: when we reach the point of withdrawal, how do we go about getting money out, and who pays the taxes? When you first start withdrawing from an RESP, you want to make sure that the money is coming from the Education Assistance Payment (EAPs), this is the government grants and bonds, as well as, the growth of the investments. Within the first 13 weeks of full-time enrollment in post-secondary institution, you can only withdraw up to $5,000 of accumulated income. After the 13 weeks, you can access the rest of the RESP savings. The EAP portion of the funds within the RESP are taxed at the post-secondary student’s tax bracket, as a full-time student it is not going to be much of a tax bill.  

Another common question that I am asked by clients is: what happens if my child decides not to pursue a post-secondary education? In this case, either the funds flow to the remaining children that will be attending, unless there is no other recipient. In this situation, you have two potential options at your disposal. You can either: collapse the RESP all together, or you can roll your contributions and the gains into a registered retirement savings plan (RRSP), so long as you have the available contribution room. Please keep in mind that there are two portions to the RESP: contribution and accumulated income. Contribution is any money that has been deposited into the plan, and you are able to withdraw your contributions from an RESP at anytime for non-educational purposes. Accumulated income is a combination of the: CESG; CLB; dividends; capital gains; and interest payments. When closing the RESP or transferring it over to an RRSP you need to make sure that any government grants or bonds received for the child have been returned. Once you have done so and are looking to collapse the RESP account, you are taxed on any investment gains at your current income level. If you roll the remaining money after returning the CESG and CLB, the investment gains can be transferred into an RRSP tax free.

If you are looking to update your plan, perhaps have it evaluated, or simply looking to build one; reach out to a certified financial advisor to better understand how these options and strategies could work for your goals and objectives.

This article was prepared solely by Omar Baqa who is a registered representative of Manulife Securities Incorporated. The views and opinions, including recommendations, expressed in this article are those of Omar Baqa alone and not those of Manulife Securities Incorporated. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund