Education Matters Online
Feature

Volume 1, Issue 1: April 7, 2003

Saving for a child’s post-secondary education nowadays is almost a necessity rather than a luxury. As teachers and education workers, you appreciate the value of higher education and hope your children will aspire to greater achievements. But the high cost of a post-secondary education today can make this a challenging goal for parents to budget, and the cost of a university education is expected to increase exponentially in years to come. Often times, teachers and education workers are caught in a quandary: retirement comes at the same time that their children are starting university or college. They find themselves living on a reduced income while providing a greater level of financial assistance to their university-bound children. Some forward planning and a little assistance from the government can go a long way to help close the gap.

There are many different ways of saving for a child’s education: scholarship trust funds, non-registered “in trust” accounts, and RESP’s. Registered education savings plans (RESP) are increasing in popularity due to recent enhancements to these plans. An RESP is a “ tax sheltered” plan to which contributions are made by the subscriber (generally by parents or grand-parents) on behalf of the beneficiary(ies) (children or grand-children), for the purpose of funding the beneficiary’s university/college education. Unlike an RRSP, the contributions are not tax deductible, but like the RRSP, the income and growth on the contributions are tax deferred until such time as the funds are withdrawn. When the funds are withdrawn, the income is taxed in the hands of the beneficiary who is generally in a much lower tax bracket – a wonderful opportunity for income splitting and tax deferral among family members.

In addition to your own contributions to your child’s RESP, the government will match 20% of your savings, up to a maximum of $400 per year, per child. This government contribution/match is called the Canada Education Savings Grant (CESG). Although you can contribute up to a maximum of $4,000 per child to an RESP, the CESG will not exceed $400, with the exception noted below. Any family member can contribute to a child’s RESP as long as the combination of all the contributions does not exceed $4,000 in a year or $42,000 in a lifetime. A lifetime maximum of $7,200 also applies to the CESG.

For children born after January 1^st, 1998 the CESG room accumulates annually regardless of whether or not an RESP is opened. For example, a child born in 1999 would have accumulated CESG room of $1,200 (3 x $400) by the end of December, 2001. Therefore, in a year where a contribution of $4,000 is made to an RESP, a CESG contribution of up to $800 would be added to the plan. This would allow parents or grand-parents to defer payments in some years where cash flow may not permit them to make the “full” RESP contribution of $2,000 per child.

There are two different types of plans: individual or family RESP’s. For an individual or non-family plan, only one beneficiary can be appointed (although a different beneficiary can be substituted at a later date) and the beneficiary need not be related to the subscriber of the plan. A family plan can allow for more than one beneficiary under the plan, but all beneficiaries must be connected by blood or adoption to the subscriber and all must be under the age of 21 when appointed as beneficiary under the plan. The benefit of this type of plan is that all of the income earned in the family plan could be directed to one beneficiary attending university if others ultimately choose not to pursue a post-secondary education. As well, it is possible to open more than one RESP at different institutions for the same child, similar to opening more than one RRSP account.

 A few other rules apply to CESG’s and RESP’s:

The main reservations for subscribing to RESP’s are the consequences should a beneficiary not attend university/college. In previous years, the capital would be returned but the income/growth would, for all intents and purposes, be “lost”. More recent Federal Budgets have allowed a number of strategies which make RESP’s a very attractive investment vehicle for savings. Should your child choose not to attend college or university, the RESP can be collapsed, contributions returned to you tax free and the growth on the investment (up to $50,000) transferred to their RRSP or their spouse’s RRSP (provided certain conditions are met).

Alternatively, if you or your spouse do not have the RRSP contribution room, the funds can be withdrawn and an additional 20% will be assessed on the withdrawal. In either case, the CESG must be returned to the government, but the subscriber is permitted to keep the income and growth earned over the years on the CESG’s.

For those of you who may worry that your child/children will be limited to only a handful of eligible institutions, you need not be concerned. The funds in the RESP can be used towards any Canadian post-secondary education stream, including universities, colleges and any recognized education course providing occupational skills. And if little Johnny is destined to attend Harvard University, you will also be able to use the RESP funds since full-time attendance at any post-secondary institution, including those outside of Canada, are eligible under the CESG plan.

So why choose RESP’s over other forms of savings? The CESG offers an unbeatable opportunity. The grant allows you to accumulate more assets in a shorter period of time for your child’s post-secondary education. In essence, you achieve an immediate 20% return on your investment. Here, in numerical terms, is the reasoning:

In order to provide an income stream of $10,000 per year for a four year post-secondary program, for a child who is five years old today, a parent or grand-parent must save $187 per month in an RESP, starting now (assuming a long term rate of return of 8%). In an “in trust” account, the savings required to achieve the same objective increases to $294 per month – a 57% increase over the RESP option.

As teachers and education workers, you not only appreciate the value and necessity of a solid post-secondary education, but you also recognize the increasing cost to your cash flow and your child’s. RESP’s provide the greatest amount of flexibility and the best value for one’s investment dollar. For more information RESP’s and OTG’s own RESP accounts, please contact us at 1-800-263-9541.

Marie C. Blanchet, Hon. B. Comm, CFP, RFP, CIM, FCSI is a salaried financial planner with the OTG Financial Inc., a financial organization dedicated to helping teachers and their family members achieve financial independence. Marie brings to the organization over ten years of experience in the financial planning field. The above comments are presented for information purposes only and should not be relied upon as a substitute for professional advice in specific situations.

Founded in 1975, OTG Financial (formerly Ontario Teachers' Group) was established to equip education workers with preferred access to superior financial services. Today, OTG Financial is a dynamic enterprise that is unique, experienced and aware, providing Ontario's education community (and immediate families) with cost effective access to investment advice, financial products, financial planning, and mortgage services.

Let us not take thought for our separate interests, but let us help one another.
(OSSTF Motto)

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