Prepare yourself for “sticker shock” if you are shopping for a university education for your child. According to Statistics Canada, tuition fees for undergraduate programs have risen by an average of 4 per cent over the past four years — outpacing the rate of inflation. Therefore, if you don’t begin saving well in advance for your children’s future post-secondary education, financing that degree may require you and/or your child to take out substantial loans. Your investment planning advisor at CDSPI Advisory Services Inc. can provide strategies for post-secondary education savings and explain the investment vehicles available for this purpose, including:
Registered Education Savings Plan (RESP)
For post-secondary education savings, an RESP is a superior vehicle which offers tax-sheltering and government grants. One of the available grants is the Canada Education Savings Grant (CES Grant) — a $7,200 top-up grant provided by the federal government for each eligible RESP beneficiary. You can receive the maximum lifetime grant of $7,200 by contributing $2,500 each year into an RESP in the 14 years after a child’s birth and $1,000 in year 15. The maximum that can be contributed to an RESP is $50,000.
Tax-free Savings Account (TFSA)
For families who have contributed the maximum $50,000 allowed for each child, contributing to a TFSA is another excellent way to save for post-secondary education. A TFSA also has an advantage that an RESP does not have: withdrawals from a TFSA are not taxable.
You can contribute up to $5,000 annually to your own TFSA for your child’s post-secondary education (or for any other savings goal). You can also gift $5,000 each to family members (e.g. to your spouse or child age 18 or over) so they can contribute to a TFSA of their own. Income attribution rules don’t apply to the money you give to your family for their TFSAs, so you don’t have to worry about any potential tax consequences. However, you should keep in mind that you would lose any say in how the money is used once you have gifted it.
Non-registered Investment Account
A non-registered investment account also offers many distinct advantages when investing for your children’s post-secondary education, including a wide range of investment funds (such as corporate class investment funds which may allow for the deferment of taxable income until the funds are sold, and provide income in a more tax-efficient manner), low fund management fees and no sales charges or administrative account fees to drag down your returns.
Finding Money for Education Savings
Your investment planning advisor can also offer practical solutions to help your family invest for post-secondary education savings goals. For example, by investing the $1,200 universal child care benefit (UCCB), which is available to families with children under age 6, each of your children could have nearly $20,000 in their RESPs by age 18 — even if you never contribute another cent. (The calculation includes the UCCB and CES Grant for six years, and assumes a 6 per cent annual rate of return.)
The tax refund you receive from your RRSP contribution is another possible source for money for your children’s RESP.
You may also consider asking family members such as aunts, uncles and grandparents to contribute to your children’s RESP. However, contributors should be aware of how much the others are putting in to avoid exceeding the lifetime contribution maximum.