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The Money Management Newsletter: RESP - Education Savings
Start saving now for your children's education

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 When the earnings are withdrawn, the student pays the taxes - usually at a much lower rate.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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© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700


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