R-E-S-P-E-C-T for RESPs

Attending college or university today is quite different than when we were students. Courses and degrees have changed (you can now earn a credit in a course dedicated to The Beatles — no joke), laptops now dominate lecture halls with nary a pencil in sight, and professors don’t look as old as they did when we attended class. And you probably already know about the skyrocketing tuition fees. The cost alone is enough to make you appreciate Registered Education Savings Plans (RESPs) and, thankfully, you have other options that will help your kids get the education you yearn for them to secure. Let us tell you more.

A lot of us will be nearing retirement just when we’ll need to finance our children’s higher education.

With so many of us delaying parenthood until our 30s, a lot of us will be nearing retirement just when we’ll need to finance our children’s higher education. Even if that isn’t the case for you and your family, funding post-secondary education is always a concern because of rising costs.

Here are some ways to be smart about it:

• Use a tax shelter to help your kids. By setting up and contributing regularly to a Registered Education Savings Plan (RESP), your children’s education funds will grow tax-free. With the right asset mix — more conservative investments if your timeline is short — an RESP can boost education funds for kids of any age.
• Let the government help. When you contribute to an RESP, the federal government’s Canada Education Savings Grant will match 20% of your yearly contributions, to a maximum of $500 per year per child in most cases. (Higher maximums apply to low-income families.) Provincial top-ups, too, are available in Quebec and Alberta.
• Apply for scholarships. Even if your kid isn’t a straight-A student, he or she may be eligible for a scholarship. Many smaller or local scholarships are based on need, athletic ability or community involvement.
• Encourage your kids to help. When your kids invest their own money, any earnings are taxable to them. If you cover their daily expenses, they can direct everything they earn from part-time employment into a savings or investment account.

Turbo-charge your RESP with a TFSA

RESPs remain the first choice when saving for post-secondary education. However, the introduction of Tax-Free Savings Accounts (TFSAs) affords a new opportunity to turbo-charge savings. With a TFSA, all earnings are tax-free. So are withdrawals. All Canadians over the age of 18 are allowed to contribute up to $5,000 in 2010 (the maximum annual contribution is indexed to inflation).

Here are two effective RESP strategies that make the most of the TFSA’s unique benefits:

• Maximize your own TFSA contributions. When your child is ready to go to college or university, you can withdraw as much as you want, tax-free, to cover the costs. Even better — you can put that money back in your TFSA the following year (or later).
• Give your child the money to start a TFSA. As long as your kid is over 18, he or she is entitled to contribute up to $5,000 a year. There are no tax consequences for you for giving your child the money to contribute, and your aspiring student can make tax-free withdrawals as needed while at school.

Crank up education savings

Professional help can help you crank up education savings while taking into account such factors as your tax bracket, the level of education your child is expected to pursue, and the number of investment years remaining.

That way, you can prepare for your children’s education costs without having to sacrifice your own retirement security.

 

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