How to use RESPs to save for post-secondary schooling
May and June bring thoughts of summer vacations, the end of the school year, and graduations. For many students, post-secondary education is only a few years away. And their parents are often worried they won’t be able to afford to send their kids to university. Unless they start planning now, they could be right. Here’s why.
How much does a university education cost?
The hard reality is that post-secondary education is an expensive proposition. Yes, the real cost of tuition is heavily subsidized by governments. But the amount students have to pay is still considerable. According to Statistics Canada, students graduating in 2016 paid an average of $6,100 per year tuition, with undergraduates in Ontario paying the highest, at an average $7,800. Add residence expenses of at least another $8,000 per year, and you’re up to $15,000 at the top end. Oh, let’s not forget books, snacks, clothing, laundry, transportation, phones, and so on for at least another $2,500 to $3,000 per year.
So how much does that four-year university education end up costing? At a minimum, would you believe $72,000? And that’s in Canada. And for a standard four-year university program – not a professional degree, like medicine, law, or dentistry, which is even more. Undergraduate students in dentistry ($18,934) paid the highest average tuition fees in 2015-16. They were followed by students in medicine ($13,416), pharmacy ($11,723) and law ($10,983). These four programs recorded some of the highest percentage tuition fee increases: dentistry (+4.5%), pharmacy (+4.0%), law (+4.0%) and medicine (+3.3%).
Thinking about aiming for an exalted American Ivy League spot? Try $63,000 for a single year! With inflation and rising costs, those amounts will just keep on growing.
How do you possibly save that much?
So those proud parents with a grade-schooler or a high-school teen with aspirations to higher education have a lot on their plate. Luckily, there’s a tax-efficient way to save for that. It’s called the Registered Education Savings Plan (RESP). The key is that the sooner you start, the better off you’ll be.
Basically, the RESP lets you invest money for your child’s through a special plan in which the investments grow tax-free for as long as they’re in the plan. In addition, the government kicks in Canada Education Savings Grant (CESG) of 20% of contributions to the RESP, to an annual limit of $500 for a lifetime maximum of $7,200. The grant is enhanced for lower income families.
The extra tax benefit of an RESP comes later. When the funds are withdrawn for educational purposes, the money is taxed in the hands of your child, who will likely be in a zero tax bracket. So again, no tax will be payable.
The magic of compound growth
Not only can you contribute as much as you want every year, up to a total maximum limit of $50,000 per child, but remember that the government kicks that a grant of up $500 per year based on your contributions. The whole thing can add up to a nice little tuition nest-egg. At a steady return of 6% on, say, a mutual fund investment of $200 per month for 18 years yields a total over $78,000, of which only $43,000 is direct contributions, well below the $50,000 RESP maximum limit. Increase the size of contributions or the investment yield, and the nest-egg grows even bigger.
RESPs come in many different versions offered by various sponsoring organizations. There are individual and family plans. You can also start up a self-directed RESP. To be sure you’re getting the features you want and to integrate your RESP strategy into your overall financial plan, your best bet is to check with your financial advisor before signing on the dotted line.
© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice. Securities mentioned are not guaranteed and carry risk of loss.