When my children were born I believed it was important for them to get a post secondary education (yes, even at that early age) and I planned to save as much as I could for that purpose. Of course, there was no RESP at that time, but I did receive monthly Universal Family Allowance payments (starting at $16 for my first child).
Saving For Post Secondary Education
Savings and investment options were very limited at that time, especially for small amounts and I dutifully deposited the Family Allowance (or Baby Bonus as it was called) into a savings account. When I had sufficient funds, I purchased Canada Savings Bonds each year. As mentioned in previous posts, I subsequently purchased mutual funds and (for my youngest son) real estate. From those small initial deposits they ended up with over $30,000 each by the time they finished their post secondary education.
With all the options available these days I think one could easily double or triple that amount (and more). An RESP (Registered Education Savings Plan) is the obvious first choice and the Education Savings Grant of up to $600 annually is a nice bonus to help increase your returns. If you are eligible for the Child Tax Benefit you can start an RESP with the Canada Learning Bond of $500 to start with and $100 a year until your child turn 15 years of age, without even putting a penny of your own money towards it.
Another way to save for post secondary education is to open a regular investment account as an informal trust. The account is in your name “in trust” – you don’t have to name a beneficiary. This is what I did. There are no restrictions on the amount you invest, you are not penalized if your child doesn’t attend a post secondary institution and you retain ownership and control of the account and can access the money at any time for any purpose.
Until your child reaches the age of majority, you have to pay tax on any interest or dividend income and your child pays tax on any capital gains and reinvested interest or dividends. For this reason, growth mutual funds are a popular choice for informal trusts.
Any income earned from invested Child Tax Benefit payments deposited into a non-registered “in trust” account is taxed in the child’s hands. Just make sure you keep records tracing the investments back to these payments in case you’re audited by the taxman.
It may seem daunting when you see what tuition may cost in eighteen years but you’ll be amazed to see how fast your savings can grow after the first couple of years. Just remember:
- Start early, invest regularly and stay the course (Hmm, I think I’ve heard this before)
- Don’t make unnecessary withdrawals (fund that trip to Disneyland some other way)
- Review your investments periodically. New investment options are available all the time. Be sure to investigate and do your due diligence to see if they fit with your objectives and circumstances. You don’t have to stick with the same plan indefinitely if a better option comes your way.
Finally, once you’ve started your savings plan, don’t worry about it. Enjoy your children now, while they still think you’re wonderful.
Check out The RESP Book to understand how RESP accounts work and how to get one started, what kind of RESP account to set up and what kind of investments to buy.