Choosing the right savings tool
Experts struggle to find a better saving tool for education than registered education savings plans (RESPs). Not only do they offer tax advantages, but they come with an annual government grant, which can be used to help pay for trade school, apprenticeships or a university education.
Loved ones can contribute as much as they’d like to an account, up to a lifetime maximum of $50,000. However, only the first $2,500 each year qualifies for the Canada Education Savings Grant, which matches 20% on contributions for up to $500 per year.
“If you learn the rules upfront, and a child attends any kind of post-secondary education, the RESP is by far the best means of saving for education,” says David Christianson, certified financial planner and portfolio manager for National Bank Financial Wealth Management in Winnipeg.
And he’s not alone in that opinion.
“I can't see a scenario in which it's not a good idea,” says Tennant.
Improve your financial well-being
Consider what you want to accomplish
If a relative’s goal is to simply help a young family member pay for school one day, funding an RESP is the simple answer to that simple question.
To get the most out of the Canada Education Savings Grant, that means contributing $2,500 for 15 years. While unused entitlements can be shifted to the next year, you only have until the beneficiary turns 18 to max out the grant contributions, meaning starting early and contributing regularly will be the best strategy to get the most of this bonus money.
But after maximizing the government grant matching, Christianson wouldn’t recommend contributing more than $2,500 a year.
With that in mind, some families may want a more flexible option that allows children to use the money for things other than education, or an account that doesn’t have a contribution limit, like a trust. But Christianson wouldn’t suggest going through the trouble of that for anything less than $10,000.
And as with all major financial decisions, before moving money around, relatives should reflect on what it is they hope to accomplish.
Christianson says one advantage with RESPs is that they can only be used for educational purposes, meaning beneficiaries can’t cash out the account early and blow it on fun cars or luxury vacations.
And, he adds, when the goal is saving for school: “Even for those affluent grandparents, the best tool is still going to be the RESP.”
It’s also important to be clear about what type of account you’ve signed up for. There are other products on the market that are group or pooled savings accounts that can come along with more rules and regulations — and most importantly, fees.
“An RESP that you set up at a credit union or bank or financial institution [will be] self-directed and fully flexible within the limitations of the rules,” says Christianson.
What happens if a beneficiary never goes to post-secondary
Of course, given that we never know what will happen, many parents and grandparents worry where their money will go if their kid one day decides not to pursue post-secondary education.
First, Christianson says it’s important to remember RESPs can be used for a variety of programs, not just university degrees.
But if the beneficiary’s plans don’t include any of those options, subscribers can always withdraw their initial investment. They’ll have to repay the government grant money, but they’ll be able to keep the interest earned on it after it’s been taxed.
“The worst case is you've deferred tax and you've been able to earn money on the government's money,” says Christianson. “And even if the child ends up being a ne’er-do-well, or you don't want to give anything to them, you've got a lot of money that you wouldn't have otherwise had.”
Wealthsimple x MoneyWise
Keep your priorities straight
Although they’re both advocates of funding RESPs to help the children in their lives, both Christianson and Tennant agree there’s a lesson to be learned in allowing kids to shoulder some of this financial responsibility themselves. Tennant says she took her education more seriously because she had to pay her own way.
And Christianson, whose first grandchild was born last year, happily contributes to her RESP in the hopes that all his granddaughter’s dreams come true one day — just not too quickly or easily.
“We're not putting all this money aside so kids have a free ride,” he says. “It's just so it's going to be possible [for them to afford it], along with their own contributions.”
But most importantly, he adds, wanting to help the next generation may come naturally, but draining your savings to put your grandkids through school is a risky move — especially if you’ve already retired or don’t have decades of work left to make up a deficit.
Which means grandparents in particular should make sure their retirement is secure first and then only give away what they can afford.
“People have to make sure they don't sacrifice everything for the possibility of a grandchild going to university,” says Christianson. “Don't give your grandkids the shirt off your back. Put your own oxygen mask on first.”
You're 5 minutes away from the best mortgage
Searching for your perfect mortgage shouldn’t be hard.
Homewise is an online brokerage that will negotiate on your behalf with more than 30 big banks and other lenders, completely free, and it only takes five minutes to apply.
If you're in the market for a new mortgage, or if you're looking to refinance before interest rates rise again, go to Homewise now and answer a few simple questions to get started.