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 The
Money Management Newsletter: RESP
- Education Savings
Start saving now for your children's education
By David J. Newman
Director, Financial Information Services
Money Management Newsletter - April 1997
If you're hoping your children will get a higher education
someday, get ready for a shock. When you take everything into consideration,
the total cost for a diploma or degree could be terrifying. In fact, the
1995-96 student budget prepared by the Canadian Federation of Students
allocates $8,890 for tuition, books, rent and food. Assuming inflation
continues at three per cent per year, a four-year undergraduate degree
in 2014 will cost more than $65,000.
Government cutbacks mean that fewer loans are available and with tuition
costs constantly rising, competition for them will be fierce. If this
trend continues, many students won't be able to afford a post-secondary
education. Only the wealthy, those on scholarships and the children whose
parents planned ahead will be able to afford the costs of getting a degree.
How will you pay for your children's education? You have three choices:
You can pay before, during or after they're in school. If you take out
loans, you'll pay after by paying back the loan - an expensive proposition.
If you pay during, you'll have to cope with the costs over a few years
- not easy when you've got normal living expenses to pay. This leaves
one sensible option: Begin saving now.
Two savings vehicles can help you start now: Registered Education Savings
Plan (RESPs)
and in-trust accounts. An RESP is a government-approved plan that permits
earnings to compound
on a tax deferred basis. Under recently proposed budget changes, you can
contribute up to $4,000 each year, with a lifetime limit of $42,000 for
each beneficiary.
While you get no tax deduction for your contributions, the tax deferral
does enable the student beneficiaries money to grow faster. When the earnings
are withdrawn, the student pays the taxes - usually at a much lower rate.
Under the proposed 1997 federal budget, the non-taxable contributions
can be returned to you at any time and the growth may, under certain conditions,
be transferred to your RRSP.
In-trust accounts are another means of saving for your child's education.
An in-trust account belongs to a minor child, but is managed by an adult.
It's an excellent way to save for school because the child can't get access
to the account without your permission or until he or she turns 18. Potential
exists to build a larger pool of savings over the long term because contribution
levels are not limited. Dividends
and interest income will be taxed in the hands of the contributor, but
capital
gains from the investment may be taxed in the hands of the child.
And if the child decides not to attend college or university, the money
can be used for other purposes.
"It's wise to start a legacy for learning for your children - don't
leave them with a legacy of debt," says Martin Kosterman, Senior
Financial Advisor at Fiscal Agents.
If you make only a $100 contribution to an RESP or in-trust account at
the beginning of each month and receive an average annual compounding
rate of return of 10 per cent for 18 years, you'll end up with enough
money to cover your child's education. Plus, it will have cost you only
$21,600. So start now and invest regularly - next to lump-sum* investment,
it's the most sensible option for paying for your children's education.
*By investing a lump sum of $10,200 into an equity
mutual fund earning an average annual compounding rate of return of
10 per cent when your child is born, you'll end up with enough to pay
for your child's education.
* * *
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