New parents are faced with a number of new expenses. Diapers, day care, summer camp, organized sports – and then – there’s higher education for their little genius. What’s it going to cost? The cost of a 4 year undergraduate degree for a student living away from home today is in the range of $75,000. Depending on which statistics you read, this could easily be in excess of $100,000 in 18 years. Throw in some post-graduate studies or a professional degree and the costs just keep rising.
RESP Basics
You won’t get a tax deduction for contributing to a Registered Education Savings Plan; however, it allows your savings to grow tax-free with your child paying the tax (if any) on the growth when it is withdrawn. Furthermore, the government will give you an extra 20% on your contributions up to $500 per year to a lifetime maximum of $7,200 via the Canada Education Savings Grant. You can contribute up to $50,000 per child over the life of the plan. Keep in mind that to maximize your CESG, you should contribute a minimum of $2,500 per year for 15 years.
In the event that your child does not attend a post-secondary institution, the CESG will have to be paid back to the government. You will get back the principal that you contributed, and depending on the type of RESP, you may also be able to transfer up to $50,000 to your or your spouse’s RRSP – if either of you have contribution room. Alternatively, when you establish your RESP you can designate it as a ‘family plan’ and more than one child can be named as beneficiary. So, if one child does not go on to postsecondary education, the funds can be used by another child in the plan.
TFSA vs RESP
Now that we also have the opportunity to contribute to Tax Free Savings Accounts, should these be used in lieu of RESPs for education savings? Contributions to both TFSAs and RESPs are made with after-tax dollars and both offer the benefit of tax-deferred growth. RESPs have the advantage of the 20% CES Grant; however, they do have some restrictions if the child does not attend school. If you discount the CESG, then the TFSA is superior to the RESP due to its flexibility.
I would argue that if there is a good chance that at least one child in the family will attend post secondary education, the RESP wins out over the TFSA due to the CESG. You should ensure that the type of RESP chosen has the flexibility you desire with respect to investment decisions and possible penalties should the beneficiary not go on to higher education. There are many personal factors to consider, but it is most likely more profitable to save for your child’s education in a RESP by contributing just enough to get the maximum CES Grant and channel any contribution that doesn’t receive the CESG into a TFSA instead.
So… How Much?
Assuming a 6% return on the savings plans, if the total annual contributions are $3,000 (including the $500 CESG for the first 15 years), then you should have approximately $98,000 saved. With adequate planning and a structured budget, $200-$250 of monthly savings is generally achievable. That being said, if you are starting later in the game or have many children, students can always pitch in through summer jobs or co-op terms, or simply live at home during their higher education years.
The Moral
Higher education may be an expensive proposition but it is an investment that generally produces good returns in the form of a higher pay cheque. As with all savings plans, start early, let compounding returns help build your account and plan for the long-term.