Saving for you child's post-secondary education can be difficult for many Canadians. We all have different priorities in life that also need extra cash such as saving for your own retirement, paying rent/mortgage, bills, buying food, etc. Trying to prioritize your savings to fund something 18-20 years into the future for your child may take a back seat to other things along the way. If this is the case, then why not consider saving money for YOURSELF in a RESP, use the tax free growth and government grants to pay for your child's education, and then take back every penny you put in for yourself? Sounds too good to be true, doesn't it? Well, it can be done!
Let's look at the following example to see how this can work:
Open up an RESP with your advisor and start a $50 biweekly contribution into this investment account. Most Canadians can probably find an extra $50 every pay cheque. Whether it means fewer trips to Starbucks, eating out less, or fewer trips to the local watering hole...we can usually make it work. An eligible beneficiary of an RESP will receive a 20% government grant on every contribution into the account up to a maximum of $500 per year or $7200 lifetime. In this example though, we will be receiving $10 of government grant every two weeks, or $260 per year.
Making the investment choice inside of an RESP I usually like to recommend a mix of stocks and fixed income products around a 70-30% mix to start. We would reduce the amount of stock and increase the fixed income as the child nears high school graduation to reduce risk and the overall volatility as the account nears withdrawal stages. With this approach we will assume a 6% annual average rate of return. With the $50 biweekly contribution paired with the government grant money and an average 6% annual rate of return, we would have approximately $46,124 in this account after 17 years. This amount is from $22,100 of principal (contributions), $4420 of grant money, and $19,604 of growth.
Many Canadians do not realize that once your child is in post-secondary school, that you can withdraw 100% of your contributions tax free and they do not have to be used for any post-secondary expenses. So, essentially, you can take back all that money you saved over the last 17 years for yourself, and will still have $24,024 of grants and growth to allocate for your child's post-secondary schooling. Your child will be taxed on the grant/growth withdrawals, but assuming they have no income while attending school, plus the available tuition tax credits, and assuming we can spread the withdrawals over 2-4 years, then they will also pay zero or very little tax. The grants/growth in the account do not have to be allocated directly toward any school expenses either, as long as the beneficiary is enrolled in an eligible post-secondary institution then they can be withdrawn and used at your own discretion.
$24,000 can pay for a lot of schooling, but depending on what your child ventures into for post-secondary studies (4 year degree, 1-2 year diploma, 3 month training course), and whether or not they need extra expenses covered if they're not living at home would require a more in depth analysis. This is merely an example showing some of the benefits and flexibilities of the RESP account to use for yours and your children's benefits.
Any questions on RESP's we are always here to lend a helping hand. Happy Saving!
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