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When to put the kids first
It makes sense to save for your children's education ahead of your retirement
THERESA EBDEN
As a manager who oversees sales of consumer goods at Irving Oil gas stations in Canada's west, Ernie Yurkiw knows a thing or two about the value of a dollar.
So when it comes to saving for a post-secondary education for his three children, he knows it's going to cost him. But like many Canadians, the 37-year-old is not sure how to save for his kids, who are ages 4, 7 and 11.
Like many parents in Canada, Mr. Yurkiw hasn't started a Registered Education Savings Plan, the tax-sheltered investment vehicle that allows parents to save for their children's post-secondary educations.
"We haven't set one up for a few reasons. We're fanatical about maxing RRSPs and paying down debt, but also it's an area we've missed, and we're thinking of playing catch-up," he says in an interview from his home office in Calgary.
Even with his eldest child's freshman year coming in less than a decade, Mr. Yurkiw isn't panicking - his annual salary of about $125,000 and income from an investment property give him breathing room. But with $200,000 already saved for retirement, Mr. Yurkiw and his wife, Karen, should consider starting an RESP immediately in order to make the coming decades more affordable, says Tom Zaks, an investment adviser at RBC Dominion Securities Inc. in the Toronto area.
In fact, Mr. Yurkiw would have been better off if he'd started RESPs as soon as his children were born, says Mr. Zaks, a certified financial planner.
For one thing, contributing $2,000 a year for each child would qualify him for a Canada Education Savings Grant.
Created in 1998, the grant pays at least 20 cents for every dollar on the first $2,000 of annual RESP savings made on behalf of a child younger than 18 who has a birth certificate and social insurance number. There is a lifetime limit of $7,200 per child, and you must begin saving before the end of the year a child turns 15.
It's possible for Mr. Yurkiw to slowly catch up on years he missed the grant for his kids, but he can only make up for one missed year each 12 months going forward, in addition to regular contributions.
Another reason parents should consider beginning RESPs the day they bring their babies home is the tax-sheltered growth the plan provides, Mr. Zaks said. Just like Registered Retirement Savings Plans (RRSPs), saving early means more time for the money to grow while it's protected from the taxman.
And grow it must. Children who are one year old today may pay as much as $150,000 for university, according to data from the Canadian Scholarship Trust, a Canadian RESP provider based in Toronto. Parents playing catch-up should get moving on their contributions, which can amount to as much as $4,000 annually, Mr. Zaks says.
Compared with Mr. Yurkiw's retirement date, his children's post-secondary education begins relatively soon, Mr. Zaks added. For now, if Mr. Yurkiw still wants to contribute to his sizable RRSP, he can use the tax refund to build his children's RESPs, Mr. Zaks says.
He could also investigate the possibility of setting up automatic contributions from his paycheque into the RESP.
To get the maximum CESG grant, he would need to contribute $166.67 a month per child, Mr. Zaks added.
"Because you get that tax shelter, if the child is very young it always makes sense to maximize at the beginning. You're going to get that tax-sheltered growth until they get to go to school," he says.
Should a child not go to university, a parent can transfer the money to their own RRSP if there's room, after giving back the CESG grants. Otherwise, parents can withdraw the money and lose both the grant and the taxable amount on the gains.
It's less paperwork if a parent sets up a single family account RESP, particularly if one child doesn't go to university, Mr. Zaks says. The maximum lifetime RESP contribution amount for each child is $42,000.
With mortgages on both his home and investment property in Vancouver totalling $191,000, Mr. Yurkiw hasn't been sure whether he should pay those off before starting the RESPs.
From Mr. Zaks' perspective, Mr. Yurkiw could sell the $225,000 investment property and use the proceeds to pay off his home mortgage and catch up on RESPs. When deciding between using found money to pay down a mortgage or invest in RESPs, Mr. Zaks says, parents of older children should first consider how much the mortgage is costing.
"Look at the interest rate you're paying on your mortgage, as well as the cash flow you have," he says. "If you got 8 per cent on a mortgage, you may want to put down more than if you had a 4-per-cent mortgage."
Again, the age of the child will play a role in the mortgage-versus-RESP decision. It makes more sense to pay into an RESP if the child is younger, to get the tax-sheltered growth, Mr. Zaks says. But even so, the 20-per-cent government grant makes the RESP more attractive nearly every time, he adds.
The worst mistake a parent of an older child can make is to attempt to aggressively grow the RESP with riskier investments, he adds.
"Some parents might say, 'My kid's 15 and I want to put it in high growth stocks - let's get it to triple or double,' " he says. "It works against them because they could lose everything. The investments with higher growth opportunities are more volatile and could go down in value. If you're two years away, it's better to put it in something safe."
Because not all parents are able to maximize their RESP and RRSP contributions as well as make extra payments on the mortgage, it's best if they also sit down with their kids to explain how their post-secondary education will be paid for, if at all, says Patricia Lovett-Reid, a senior vice-president with TD Waterhouse Canada Inc. who is also a certified financial planner.
"You can sit down with your family and say there's only so much money coming in. Maybe you have to go without some little luxuries, or have children explore scholarship opportunities," she says. Even so, she believes that RESPs shouldn't fall by the wayside, for the sake of both the parents and the children.
"One of the best investments we can make is our children," she says. "It's about providing for your children so they have a better future. As a mother of four, there isn't a better return."
In addition to the 20-per-cent annual grant from the federal government on RESP contributions, parents are building their children's future independence, she says.
Parents who wish to pay for their children's education need to act early, she added.
"In your late 20s and early 30s, you've got incredible financial demands on your life," she says. "Your immediate goal will be your child's education - that will come before your retirement. It will be your goal to put in at least the $2,000 annually to get the government grant."
Like Mr. Zaks, she recommends using RRSP tax refunds to contribute to an RESP, and the earlier the better.
"If someone has been savvy enough early on to put money in their RRSP, the power of compounding will prevail," she says.
A 35-year-old parent who has saved $70,000 in an RRSP and averages a 9-per-cent annual return will find they have $1-million at age 67, even if they never make another contribution, Ms. Lovett-Reid says. Getting this early start means more financial flexibility later on for when you begin a family and need the money for mortgages and RESPs, she says.
"You can't put a price tag on your child achieving a great education."
Theresa Ebden is an associate producer for Report on Business TV.
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