Parents, Stop Leaving Money On the Table

 

Recent survey results from Ipsos and Knowledge First Financial indicate that over half of Canadian parents are leaving money on the table when it comes to saving for their child’s future education costs, and they regret it later.

Parents are simply not taking full advantage of FREE Federal and Provincial grants for their child’s Registered Education Savings Plan (RESP) and this free money will grow by thousands of dollars when it’s invested.

We’re not talking about small dollars, either. Federally, there is up to $7,200 of free money available through the Canada Education Savings Grant (CESG), and lower income households could receive an additional $2,000 through the Canada Learning Bond (CLB). And in some provinces there are additional dollars, which may or may not be dependent on income, of between $500 and $2,500.

Saving for your child’s education matters

Simply put, educated people earn more, are happier and enjoy a better quality of life. That’s why education is one of the greatest gifts you can give your children.

Studies have shown that when a parent opens a savings plan for their child’s education, and they steward their child towards that goal, even if the savings plan has very little in it, it increases the likelihood exponentially of that child going to post secondary school.

For many parents, however, thinking of sending their children to post-secondary causes a great deal of anxiety. Education is expensive. The projected cost of Canadian tuition, books and related expenses for a four-year university degree in 2036 is approximately $125,000!

No wonder talks of tuition scare so many parents!

But, savvy planning for future tuition expenses can reduce, and hopefully eliminate, the fear surrounding it.

 

Breaking down the biggest grant

In Canada, if your child is under the age of sixteen, they qualify for free government money through a RESP. An RESP provides for tax-deferred investment growth and is a fantastic tool that allows a parent, grandparent, friend, or legal guardian to save money for a child’s post-secondary education. To set this up all you need is a Social Insurance Number for the child and an appointment with an RESP provider. When choosing this institution, do your research and get a referral.

The Canadian government encourages saving for your child’s education by giving you free money through the CESG, a powerful grant. Each year the government matches 20% on the first $2,500 contributed annually to an RESP. Every child qualifies for a total lifetime CESG contribution of $7,200. The CESG is available up until the end of the calendar year in which the child turns 17.

As the contributor, you have a total lifetime contribution limit into your child’s RESP of $50,000. If you contribute the maximum of $50,000 all at once, you’d only collect $500 because that’s the maximum contribution the government will make each year.

Although you cannot deduct the contributions made to an RESP from your taxable income, the subsequent investment earnings on RESP contributions are tax-deferred. If the plan earnings are withdrawn to cover qualifying post-secondary education expenses, they are taxable to the child, not you, the contributor. You can contribute to an RESP for up to 31 years, and the plan can remain open for a maximum of 35 years.

 

Taking full advantage of the CESG grant

Many Canadians choose to contribute in smaller installments to an RESP because weekly, biweekly, monthly, or annually allow them to collect as much of the CESG as possible AND, let’s face it, it fits much better with our budgets.

Let’s say that you want to take full advantage of the CESG grant and choose to invest $2500 per year from the moment your child is born. If your investments earn on average 5 per cent for 18 years, net of fees, the RESP would be worth approximately $121,300. Have a look:

Years Invested Your Dollars Saved Each Year Annual CESG Value of the RESP
1 $2,500 $500 $3,240
2 $2,500 $500 $6,739
3 $2,500 $500 $10,518
4 $2,500 $500 $14,600
5 $2,500 $500 $19,008
6 $2,500 $500 $23,768
7 $2,500 $500 $28,910
8 $2,500 $500 $34,463
9 $2,500 $500 $40,460
10 $2,500 $500 $46,936
11 $2,500 $500 $53,931
12 $2,500 $500 $61,486
13 $2,500 $500 $69,645
14 $2,500 $500 $78,456
15 $2,500 $200 $87,973
16 $2,500 $98,251
17 $2,500 $109,351
18 $2,500 $121,339

 

When parents DO leave money on the table

We know that parents have regrets when they don’t save for their child’s education. Two thirds of parents of high school and university aged children (14-22) said they would go back and do something differently to save more.

If you haven’t been saving $2,500 each year in your RESP – it’s not too late – you have unclaimed CESG! This means you can catch up by putting a little extra into your RESP and receive up to $1,000 in grants.

 

Unfortunately, when families don’t have savings they are trying to make up the gap through student loans, regular loans or home equity lines of credit. The latter two push the retirement dream of most parents to the back burner.