December, 2009. Vancouver, BC. Darrin and Elaina Eden opened a RESP account for their daughter Ava a few weeks after she was born. Photo: Laura Leyshon for the Globe and MailLAURA LEYSHON/The Globe and Mail
Building Blocks is a special personal finance web series geared towards educating families on money-related topics. A collection of stories, videos and discussions, Building Blocks will run online until the end of December.
It's never too late to start saving for a child's education, and there's no better time than amid the annual holiday-spending spree.
With rising education costs, perhaps this year it's time to take more of a cue from tight-fisted Scrooge and less from present-obsessed Santa and put some dollars into that piggy bank for learning.
It can be hard for some parents to save for their child's education due to other financial commitments, but it's a worthwhile investment.
"The best thing to do is start early and build some education savings into your living-expense budget," says financial planner and chartered accountant Cynthia Kett. a principal at Stewart & Kett Financial Advisers Inc. "Do what you can."
Most sleep-deprived new parents find it hard to think beyond their baby's next feeding. But Darrin Eden and his wife Elaina Spring looked into their daughter's future early on.
When Ava was just a few weeks old, they opened an Registered Education Savings Plan (RESP). Along with gifts like baby shoes and toys, they also received contributions towards Ava's future education.
"It wasn't the go-to gift, but it was certainly nice to make that available to our friends and family," Mr. Eden says.
While it may be tempting to buy another colourful toy or adorable outfit for a baby, saving for your child's (or grandchild's) education is a boring, but wiser choice. University, after all, will have a much bigger impact on their life.
And suggesting grandparents cut back on presents at Christmas in favour of contributing to their daughter's education fund, appeals to Mr. Eden.
"That is a great idea," he says. "I will pass it on to my wife and I think we'll do it."
Here are some estimates that should wake up any exhausted mom or dad and get them saving for college. Ms. Kett, a principal at Stewart & Kett Financial Advisers Inc., figures it will cost around $102,000 for a child born today to attend university in 18 years. For most parents, that is one formidable financial target.
Fortunately there are tax breaks and government grants to help out parents. The secret is to get started as soon as possible, like baby Ava's parents, in order to reap the biggest rewards from these financial incentives.
Ava's dad, Mr. Eden, said the fact his tuition was paid for (his father worked at a university), really helped him. He saw his friends struggle to pay back student debt. So, each month, he and his wife make a contribution to Ava's RESP.
"I certainly want to be able to provide for Ava," he says.
Many parents feel the same way. According to a recent report from Statistics Canada, 68 per cent of kids 17 and younger whose parents believed they would pursue post-secondary studies had education savings in 2008, a big jump from 43 per cent in 1999.
The most common way of saving for a child's education is through RESPs. The Statscan report points out that 69 per cent of those children with education savings had RESPs.
RESPs offer two advantages. The first is that the money in the account can grow without the government taxing the returns (such as interest or dividends) each year. When the money is used to pay for a college or university education, it's the child who will report the income, not the parents. Since the child won't exactly be raking in the dough, the tax bill will be small.
The second draw is the financial contribution the government will make to a child's education.
Depending on the family income, the Canada Education Savings Grant will pay out between 20 and 40 per cent of the first $500 the parents save each year for their child's RESP. There will be an additional grant of as much as $400 annually on the next $2,000 worth of contributions.
Families who bring in less than $37,885 annually may also qualify for a Canada Learning Bond that pays an initial $500 and then an additional $100 annually until the child reaches 15. This payment will also go into the child's RESP.
"It's pretty much a no-brainer," says Bruce Ball, a tax partner at BDO Dunwoody LLP. "I'd be doing enough RESP to get the government's money."
To start, parents need a social insurance number for their child. They can then open an RESP account at their bank, through mutual fund firms or group plan dealers. Grandparents and other relatives or friends can also open an RESP account for the child.
That's the easy part. The hard part is deciding how and where to invest the RESP. Experts caution people should take their time.
"Before people rush out and get an RESP they really need to understand the type of RESP program that they're subscribing for," warns Ms. Kett.
Some RESP providers require a minimum deposit or regular contributions and charge service fees, while others don't.
There are also different types of plans. With a self-directed RESP, parents decide how to invest the savings, such as in mutual funds or bonds. The money they put in the account, and what it earns, will be paid out when their child goes onto post-secondary education.
In a group plan, many parents' savings are combined and invested by the dealer. The amount a child receives when they go to college or university depends on different factors like the number of students who are the same age, according to a government website.
The individually directed RESP are more popular now because they give parents "more control," Mr. Ball points out. "It's your money. You can invest it the way you want to."
If your child does not pursue higher education, there are different rules both with the government and the RESP provider when it comes to how the money will be paid out and taxed.
By the numbers
First $2,500 The maximum annual contribution for which the government will contribute a grant to an RESP
$50,000 The maximum contribution for any child's RESP
15 to 17 For kids to continue receiving the Canada Education Savings Grant between those ages, parents must have contributed at least $2,000 to the RESP or made $100 annual payments for four years