How to Pay for Your Child’s Post-Secondary Education and Still RetireSubmitted by MacDev Financial Group on September 23rd, 2016
Wondering how you can save for your retirement and pay for your child’s post-secondary education without burning a hole in your pocket?
September marks a return back to school for post-secondary students across the country and a time when many parents are stretching their budgets to help pay and cover for expenses. A recent CIBC poll found that 1 out of 5 parents aren’t able to adequately estimate the cost of tuition and other associated post-secondary expenses.
What is clear is that the cost of post-secondary tuition keeps going up. The most recent Stats Canada data show the average tuition costs for an undergraduate degree alone is $6,191.
Kathleen Woodward, senior vice president of retail and business banking at CIBC stated parents should look at spending on average $25, 000 to $100,000 per year for a four-year degree. It’s becoming clear that needing a sure-win strategy to save for your kids’ post-secondary education is no different than needing a sure-win strategy to save for retirement.
The 123 Punch: A Financial Hit for Canadians
What that means for many parents today is they're experiencing the 123 punch of saving for their kid’s education, their own retirement and paying off a mortgage all at once. That can become a financially impossible task, especially given recent numbers of Canadian average household debt. Canada now has the highest household debt relative to disposable income. For every $100 in disposable income, Canadian households now have debt obligations of $171. (Source: Report from the Parliamentary Budget Officer).
That alone is making it much harder for parents to pitch in for their kid’s post-secondary costs yet save for their own retirement. Those who can afford to help pay for their kid’s education typically do so with a federal-government saving plan known widely as a Registered Education Savings Plan (RESP).
For example, the CIBC poll found that 76 percent of parents had set up RESP accounts to save their for their children’s education, yet many lacked the basic understanding of how they actually worked.
How RESPs Really Work
Here are a few basic facts about how RESPs work. For more information check out more on RESPs on the following Canada Revenue Agency page.
- The federal government will match eligible annual contributions to an RESP account by 20 percent (20 cents on every dollar) to a maximum of $500 per year for an annual contribution of $2,500 until the end of the calendar year when the child turns 17. These government incentives are called Canadian Education Savings Grants (CESG). They can be carried forward similar to an RRSP.
- There is also an Additional Savings Grant (A-CESG) for children from low-income or middle-income families. This money is added to the RESP to help them receive the maximum grant amount by adding an additional 10 to 20% to the first $500 put into the RESP each year.
- The Canada Learning Bond is money given by the federal government to help give parents a head start on saving for their child’s education. The funds are usually directly deposited in the RESP.
- There are several provincial grants that are eligible for RESPs as well on top of the CESG known as provincial education savings incentives, with each province having its own set.
- RESP funds can be used for any costs associated with a university education including housing and general living expenses, not just tuition and books.
- You do get tax-free growth in the RESP portfolio. It can continue to grow tax free in the hands of your child when they attend an eligible post-secondary program.
- Funds in the RESP are typically taxed at a lower tax bracket based on the student’s income.
- New rules state that there is no maximum annual contribution limit only the lifetime maximum (21 years) of $50,000.
- Contributions to an RESP are not tax-deductible.
- You don’t get control over how the funds in a RESP plan are used or how they can be accessed. For example, what if your child decides to not attend university? If your child doesn’t go to university, you must pay the government back the CESG.
- If you close or collapse the RESP, you will get your contribution back but not the gains. On the plus side, you don’t have to pay tax on any of your contributions that are withdrawn.
- Only $50, 000 of remaining RESP funds can be rolled over into your RRSP account after its maximum lifespan. This can present a problem if you don’t have any “contribution” room left in your RRSP plan. Whatever remains may have to be withdrawn as income which translates into a 20% penalty.
- If you have an individual or family RESP you have to get your investment earnings out of the plan if it has been open for 10 years and the beneficiaries have not pursued an education by the time they are 31 years old. The plan subscriber has to pay tax on any investment earnings taken out of the plan, plus a 20% penalty.
- If you have a group RESP you don't get back your investment earnings. They stay in the plan and are shared with the other plan members to increase their payments. In some cases, you may be able to transfer your RESP savings to an individual plan (depending on the terms of your plan).
- Some plans allow you to decide how to invest your savings but most don’t give you a choice in the type of investments. Therefore, you are not necessarily guaranteed a good rate of return.
- RESP plans may limit your child’s chances of receiving federal student aid and loans to cover costs RESP funds don’t. The potential of this is increasing today as university tuition and expenses increase year after year.
- The federal government sets the requirements of what classifies as a “post-secondary” education.
Bank On Yourself: You Don’t Have to Go Broke!
Back to the 123 punch problem. How can you save for both your kid’s education and retirement simultaneously? What if there was a way you could actually beat that 123 punch? How amazing would that be? Well there is a way actually with a Bank On Yourself® (BOY) plan.
Bank On Yourself is a concept that uses participating whole life insurance to shelter your money in an asset stronger and more secure than an RESP, a RRSP and even real estate. It is a life insurance policy with a Cash Surrendered Value (CSV); it is essentially a savings account on steroids because it gains annual dividends that are both protected each and every year and guaranteed. So similar to compounding interest, they accumulate. As more dividends are put back into the CSV savings, it grows tax free. And unlike, RESP's that are tied to the performance of an unpredictable stock market, with a BOY plan there is virtually no risk or potential loss of your savings. Watch this video to see how it works.
Another benefit with a BOY plan is you have greater flexibility with the funds than with an RESP. It doesn’t have to be used to simply cover post-secondary costs but can help your child pay for their first home or car, a trip around the world, or even their own future retirement. That is a bonus, especially if your child decides not to attend university or college after high-school.
Also, a BOY plan does double duty: it can pay for your kid’s education without having to sacrifice your own financial security because it serves as a safe, predictable retirement plan for you down the road. The CSV attached to the policy is similar to a personal bank account you can control and own. You can borrow from it any time you need, for whatever you need, no questions asked. As you pay back the money you borrowed, you are actually paying yourself back first and foremost, recapturing interest you would have paid out to banks or other lending institutions. (Let’s not even get into the conversation of student loans).
Bank On Yourself® is a more effective strategy than investing in an RESP. If you are interested in learning more check out the additional resources below or give us a call.
Disclaimer: This information is given for informational or educational purposes only. All financial endeavors should be vetted through a financial professional; example, life insurance broker, financial planner, accountant, and/or lawyer, as the reader sees fit. MacDev Financial Group Corp, including but not limited to its agents, staff, associates and/or partners will not assume any liability for any information printed in this article; indirectly, or assumed.