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A how-to guide for your RESP Add to ...

Most future educational cost studies I've seen assume the child will not be living at home - which of course adds greatly to the cost. This assumption ignores the huge cost reduction that is possible if the child lives at home during post-secondary schooling.

vi. Future dollars

Most of these studies use future dollars, which result in larger estimates because of the effects of inflation. Most of your RESP contributions and earnings will be in future dollars as well.

vii. They project 17 years into the future

In order to maximize the shock effect of the estimates, the timeline of the studies is usually 17 years, which adds to the future cost because of inflation. This estimate would be relevant for a brand new parent whose child won't be going to school for 17 years, but for parents with children who are not newborns, the estimate is too high.

Let's work through a scenario

One estimate for current post-secondary educational costs is $77,132 for a student going to school out of town and $51,763 if the student lives at home.

That may sound like a lot of money, but let's work through the numbers to find out how this amount can be paid without relying 100% on the RESP account. The dollar amounts are all in today's dollars for easier comparison. I'm assuming the RESP contributions start in the child's first year.

Scenario 1: Student does not live with parents

The total amount needed for educational costs in 2010 dollars is $77,132.

Let's assume the student works during the summers, saving $1,000 for her first year and $2,000 for the second, third and fourth years. The total saved from her summer jobs is $7,000. With the extra savings, the student's total education costs are now $70,132.

Her parents will pay $2,400 per year ($200 per month) from their regular budget for all four years of schooling. Their total contribution of $9,600 brings the student's total costs down to $60,532.

Assuming withdrawals from the RESP account will fund the remaining shortfall, let's tally how much should be contributed each month:

If you assume a real rate of return of 4%, you will need to contribute $163.83 per month in order to reach this goal. This results in an annual contribution of $1,966, which is well short of the maximum $2,500. The RESP grant would be paid on top of that contribution amount.

Scenario 2: Student lives with parents

Total amount of money needed in 2009 dollars is $51,763.

In this scenario as well, we will assume that the student can save $7,000 over the four years and that the parents will chip in $9,600, leaving us with a shortfall of $35,163.

Assuming a real rate of return of 4%, the monthly RESP contribution amount necessary to make up this shortfall is only $95.17 per month! This works out to an annual contribution of $1,142 -- which is less than half of the maximum contribution amount.

These scenarios show that you don't have to contribute the maximum amount every year in order to ensure that your child has enough money for post-secondary education.

As for the problem of not knowing if your child will be living at home, you can contribute enough to pay for the child living away from home, and then keep the contributions for yourself if she ends up living at home.

RESPs for adults are a waste of time

RESPs are not just for kids. You are allowed to open an individual RESP for yourself and make contributions that can be withdrawn for educational purposes.

The RESP rules for adults are similar to the rules for children except for that there are no government grants available, greatly reducing the attractiveness of this strategy.

The main drawback of the RESP account is the penalty on earnings (20% tax in addition to income tax) if the beneficiary doesn't go to school. For a younger person, the free government grant makes the risk worthwhile. In my opinion, this risk is not worthwhile for an adult who can't qualify for the RESP grant.

Adults who want to save for their own education should consider using the new Tax Free Savings Account (TFSA). This account is tax-sheltered and doesn't have any withdrawal penalties.

Excerpted from The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians. Copyright (c) by Mike Holman.

No part of this publication may be reproduced or distributed without express permission of the author.

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