Parents can use a Registered Education Savings Plan to pay for their children’s post-secondary education while growing their savings tax-deferred, as tuition costs continue to rise, a wealth advisor says.
The provincial government plans to provide $6.4 billion to colleges and universities over four years, lift a tuition fee freeze and cut back on the amount of financial assistance and grants for students. Institutions can also raise fees by two per cent for three years.
“The cost of higher education has been going up higher than inflation over the last few decades,” Tina Tehranchian, senior wealth advisor for CI Assante Wealth Management Ltd. told BNN Bloomberg in an interview. “This will add to the stress, definitely for parents, which makes it more imperative that they use RESPs as a tool to help them save for their children’s education.”
An RESP is a tax-deferred account intended to pay for post-secondary studies, including trade schools, colleges, universities and apprenticeship programs. Parents can contribute a maximum of $50,000 per child. The plan can extend to grandchildren.
Tehranchian says parents can contribute $2,500 and the federal government will pay $500 each year through the Canada Education Savings Grant (CESG).
“The maximum grant that each child is entitled to over the lifetime is $7,200 so it would be best to start as soon as the children are born,” says Tehranchian.
Contributors to a RESP can hold different types of investments such as Guaranteed Investment Certificates (GICs), stocks, bonds and Exchange-Traded Funds (ETFs). Earnings from investments and government grants are taxed upon withdrawal. Tehranchian says if parents start early, they can have a higher risk tolerance.
“If you have the tolerance for risk, you could even invest it all in equities. If you start later, then your time horizon is going to be shorter,” says Tehranchian. “Depending on your risk tolerance, you may want to be in a balanced portfolio. The closer you get to the time that the kids need to withdraw money from the RESP, the more conservative you want to make the mix.”
Low-income families may also qualify for more funds through the Canada Learning Bond (CLB). They may receive $500 for the first year they contribute into a RESP and another $100 for a maximum amount of $2,000, according to the government.
Tehranchian says government grants can only be used if children attend higher education. She says if a child does not attend post-secondary education, the account can be transferred to a sibling.
Grants, however have to be returned to the government if a child does not attend a post-secondary institution, says Tehranchian, adding that funds can also cover other expenses.
“There’s no limit on the amount that you can withdraw, and you can use it for tuition, for room and board, for any purposes,” she says.
Parents can contribute for 32 years and the account can be open for 35 years, says Tehranchian.
With files from Hue Pham, BNN Bloomberg
