Every day, my kids come home from school and I ask them the same thing: "What did you learn today?" The answer is always the same: "Nothing." So, yesterday I said to them: "That's why you have to go back again tomorrow."
When it comes to the education of your kids, don't forget about saving for their postsecondary education, even at this time of year. Sure, it's registered retirement savings plan (RRSP) season, I get it – there's only so much money to go around. And I'm a believer that saving for your retirement should generally come before saving for a child's education. But you may be able to do both, and even if you can't, saving money for an education instead this time of year could make sense in certain cases.
Consider taking one of two approaches here.
1. Contribute to your RRSP before the March 1 deadline, then use the tax savings from the RRSP deduction (which may come back as a refund when you file your 2017 tax return) to contribute to the registered education savings plan (RESP) for your kids, or;
2. Forgo your RRSP contribution and use your available cash to get caught up on RESP contributions.
Since saving for your retirement is a priority, I generally like the first approach best, where you contribute to your RRSP then use the tax savings to contribute to the RESP. Consider an example where you contribute $5,000 to your RRSP and save $2,500 in taxes (assuming a 50-per-cent marginal tax rate). Now, if you do this annually and invest that $2,500 in an RESP for a child, receive $500 (20 per cent) in basic Canada Education Savings Grants (CESGs) annually on those contributions (to the lifetime maximum of $7,200 in CESGs), and earn 5 per cent in the plan annually, that RESP would be worth $89,100 by the time the child is 18 years of age – about the right amount to pay for four years of postsecondary education at a Canadian university including rent, food, tuition and books.
If you didn't receive the CESGs and simply invested the $2,500 annually over that same period, you'd need an annual return of 6.53 per cent to arrive at that same $89,100 after 18 years in this example. So, the CESGs are worth the equivalent of an additional 1.53 per cent compounded annually in returns. Pretty good, considering this is free money from the government.
If you're like many Canadians with children, you might be behind in saving for the education of your kids. If this is the case, then you may have available unused CESG room for each of your kids. You see, the basic CESG is 20 per cent of contributions to an RESP up to a maximum of $500 for each year. If you haven't been making sufficient RESP contributions, that CESG room accumulates and you can claim it in future years. The most in CESGs you can claim in any one year for one child is $1,000 (which would be paid into the RESP, assuming sufficient CESG room, if you were to make a $5,000 contribution to the RESP in any given year).
I think about my neighbour, Peter, who has four kids. He hasn't been saving much for their education, and he could contribute $5,000 to an RESP for each of them today and receive $1,000 in CESGs for each of them right away. That's $4,000 in free money from the government. Since he was thinking about contributing $20,000 to his RRSP before the March 1 deadline, I suggested that he consider using that $20,000 to contribute to an RESP for his kids instead, collect the $4,000 in CESGs, then focus on his RRSP again soon.
The name of the game here is catching up on CESGs that would otherwise not be paid, and get those dollars compounding inside an RESP for his kids. For those with very young children, good advice is to do your best to contribute $2,500 a year, or $5,000 every second year, to an RESP for each eligible child and don't allow that free CESG money pass you by. This way, you won't have to scramble later to make larger contributions to make up for lost time.
This is where grandparents can be a big help if they have some extra money to contribute toward the education savings of a grandchild. Just be sure to co-ordinate your contributions to an RESP with your kids so that the total set aside for the grandchildren doesn't exceed the RESP lifetime-contribution limit of $50,000 a beneficiary.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.