Some grandparental supervision may be required to help today's young people afford university or college.
University tuition averaged $5,138 a year in the most recent Statistics Canada survey and living costs could easily amount to another $10,000 or more for students living away from home. Parents should be contributing to registered education savings plans to help their kids afford these costs, but let's get real for a moment.
RESPs are not being used as much as they should be by parents. Some are too financially stretched to afford it, some just don't understand the importance of RESPs and others take the hard-case view that their kids should make their own way after high school and take on however much debt is necessary.
Grandparents, maybe you should step in if you can afford it. In fact, some grandparents are already in the habit of giving their grandkids money. Bank of Montreal found in a recent survey that the typical amount was $100 per child annually. Even such small amounts can add up in an RESP over the years, but not many grandparents are taking advantage.
"It's few and far between at the present time, but it's something we want grandparents to think about," said Larry Moser, a regional sales manager at BMO.
Tax-free savings accounts, which can be set up for kids who are 18 or older, are one way to help grandkids pay for college or university. But Mr. Moser says contributing to an RESP is the better way for grandparents.
For one thing, the first $2,500 in RESP contributions a year receive a matching 20-per-cent grant from the federal government. We're talking here about as much as $500 annually per beneficiary in free government money that gets added to the investable dollars held in an RESP.
Another advantage of RESPs is that it's a dedicated plan for educational savings. You actually need to provide proof of a student's enrolment to make a withdrawal on his or her behalf.
Indeed, there's a lot of paperwork involved with RESPs, while TFSAs are wide open. In many cases, TFSA withdrawals can be done using online banking in a matter of a day or two.
"One thing I like about the RESP is that it's earmarked for something specific," Mr. Moser said. "With a TFSA, it's really easy to take money out for the wrong reasons."
Mr. Moser said that if a grandparent put $1,000 into an RESP for a one-year-old grandchild and then $50 a month, a little more than $22,000 would be available when he or she began university or college. This assumes an average annual investment gain of 5 per cent, and it factors in federal government grant money as well.
There are two ways grandparents could use a TFSA to help pay educational costs, one of them being to withdraw money out of their own account and give it to the student. By Mr. Moser's calculation, you'd end up with $3,700 less in a TFSA if you made the same contributions mentioned above for RESPs. That's because there's no federal grant money in play.
Another way to use a TFSA would be to contribute a lump sum to an account set up in the name of a grandchild age 18 or older. This is an option for grandparents who never set up RESPs and have some money they want to use to help out a grandchild already in college or university.
TFSAs look good from the tax point of view because withdrawals are not taxable. Withdrawals from RESPs are considered taxable income for the beneficiary, although many students will end up paying zero in taxes because their overall incomes are low.
Mr. Moser suggests that grandparents opening RESPs use a family plan, which can have multiple children in a family as beneficiaries (they must be related by blood or adoption to the person opening the account). If one child doesn't end up going to university, a family plan allows his or her siblings to use the money in the plan.
Two final thoughts on RESP for grandparents. One is that the $50,000 lifetime contribution limit for RESPs applies to everyone putting money aside for a child in aggregate. Grandparents cannot top up a child's RESP if the parents have already contributed the maximum amount.
Another point is that RESPs work best when they're opened right after a child is born. "It's all about the power of compounding," Mr. Moser said. "Start with $1,000, contribute $50 per month and you have a year or two paid for a child when he or she gets to university."
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How to set up an RESP
1. Obtain grandchild's social insurance number.
2. Decide between individual (one beneficiary, can be anyone) and group RESP plan (multiple beneficiaries related by blood or adoption and under the age of 21 when the account is set up).
3. Decide on financial provider: Banks, online brokers and investment advisers all offer RESP accounts.
4. Decide on investments: Pretty much anything that can be in an RRSP can be used in an RESP.
5. Set up contribution plan: Saving works best when it's automatic. How about having money electronically transferred from your chequing account into an RESP every month?
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Rob Carrick