National Post (National Edition)
Making the dream of higher education possible
Whether you’re a parent, grandparent, relative or close family friend, you want to see the young people in your life succeed. And what better way to provide them with a brighter future than through access to post-secondary education?
“In a perfect world, you want to start as soon as you can, since government grants are on the table until 17 years of age. But beyond government grants, there’s use to an RESP. A one- or two-year investment will continue to grow on a tax-deferred basis” says Michelle Munro, director of tax and retirement research at Fidelity Investments Canada.
Even if you invest late or only save a little, any investment is a win, because contributions are released tax-free, and there’s always an opportunity for earnings, such as from mutual funds suited to shortterm investing. While earnings are taxed, they are typically withdrawn by the student, who is likely making little or no income, and will have to pay little or nothing in taxes. Plus, a RESP can remain open until a student turns 36 years old, so there’s plenty of time to make investment gains, especially if the plan holder delays post-secondary pursuits.
“The first thing you want to do is secure the maximum Canada Education Savings Grant (CESG) of $7,200, which requires a $36,000 contribution over the lifetime of an RESP. Next, ask yourself, ‘How long will my child pursue a post-secondary education? Are they planning a three-year program at a college or going on to post-graduate studies that require rent and travel?’ If you have the money and you think your child is going to need it, it’s a good strategy to contribute the $50,000 limit,” says Munro.
If you have the means, go for it and contribute the maximum. If your graduate doesn’t spend it all, you can move the remaining funds to a sibling’s RESP or your own RRSP without a tax hit.
“You could also consider target date mutual funds as your RESP’s sweet spot. They provide an asset mix generally in your RESP’s lifespan – that’s often 17 years if you’ve been contributing since your baby was born – with a target date determined by your goals and available budget,” Munro advises.
A target date mutual fund is not just for retirement. Consider it for your child’s education, because it strikes the optimal investment mix within your timeline, aiming to prevent market fluctuations from throwing your balance out of whack and becoming more conservative once you’re ready to withdraw. Think of it as a wellbalanced ride that levels out in time for your target date: a few weeks before the first day of school, when tuition, rent and other education costs are due.
Munro notes ,“Whether you make lump sum or regular contributions, advisors make a difference. They can offer sound advice and guidance about funds and rates of return, they consider your investment personality and your financial goals, and they’re trained to help you strategize longterm financial success.”