Saving for your Child's Future
Education is freedom, the foundation for a future of your own making—and it's the biggest gift and the greatest advantage you can give a child. Setting aside enough to cover the costs of post-secondary education without putting other priorities such as retirement or cash flow at risk requires careful planning. The sooner you start, the better.
BMO's Education Savings Calculator is an easy way to see how much money you will need for your child's education.
The power of making regular contributions to your child's education savings cannot be overstated because of the power of compounding. The longer your money is invested, the harder it works for you. Give your contributions time to grow and produce results.
Check out the Benefit of Investing Early Graph to see the difference a few years can make. The graph compares Scenario 1, where the parents contribute $2,500 per year for 12 years starting from birth, with Scenario 2, where the parents start at age 12 and contribute for 6 years. In both cases, the parents have invested $30,000, but the compounding of returns over time gives the RESP in Scenario 1 a much higher balance.
Time horizon is the key factor in deciding how to invest the funds.
If you're setting aside money for a newborn, you have lots of time before the money will be needed. In that case, you may want to invest at least a portion of the money into equities for long-term growth. On the other hand, if college or university is only a couple of years away, you need to move to a more conservative approach to make sure the money is available as required.
Contribute to an RESP
One of the most effective ways to save is by contributing to a Registered Education Savings Plan (RESP). Like an RRSP, it can hold investments such as GICs, bonds, stocks, mutual funds or ETFs. Plus, anyone—you, a friend or a family member—can contribute on behalf of your child. While you don't get a tax deduction for making a contribution, your original investment is tax free when withdrawn, and the income or growth is taxable to your child once he or she takes up post-secondary education. At that time, because of tuition and education credits, it's unlikely that your child will have enough income to be taxed at all.
Take Advantage of Government Support
One of the key benefits of the RESP is the money the government provides for children under 18 via the Canada Education Savings Grant (CESG) until the end of the calendar year in which the beneficiary reaches age 17.2
- The Canada Education Savings Grant (CESG)
The CESG is a grant of 20% of annual contributions to a maximum of $500 per beneficiary each year. (Additional amounts are available for low and middle income families, but for all income levels, the maximum lifetime payment is $7,200.) To qualify for payment, you have to open an RESP before the end of the year in which the beneficiary reaches age 15.
- The Canada Learning Bond (CLB)
The CLB is available to modest-income families who receive the National Child Benefit if they have opened an RESP. It can provide up to $2,000 per child without any other contributions being required. Like the CESG, the CLB is paid directly into the child's RESP.
- Additional funding in Quebec and Alberta
These provinces provide additional incentive programs that could add up to as much as $3,600 (Quebec) or $800 (Alberta) to the total RESP amount. As with the federal programs, these payments are made directly to the child's RESP.
|Individual RESP||Family RESP|
|Can be opened for anyone.||Can only be opened for beneficiaries considered to be related by birth relationship or adoption to the original subscriber according to CRA guidelines (a parent, brother, sister, child or grandchild.)|
|There is no age restriction.||Can only be opened for those who are under 21.|
|Can be easier to monitor when there is a big age difference between children.||Education savings are kept in one pool and there is flexibility regarding the manner in which funds are directed towards educational expenses of the various beneficiaries (e.g., larger amounts may be directed to those who have greater needs.)|
- While regular monthly contributions are the easiest way for most people to save, don't forget that lump sums such as bonuses or income tax refunds can also be used to provide additional contributions. Use the BMO Cash Flow Worksheet to see how regular contributions along with lump sums can really boost your savings.
- If you receive the Canada Child Tax Benefit (CCTB), that money is deemed to belong to your child. You can invest it in an account in your child's name so that you won't have to pay tax on the interest earned.
- Extended family and friends can help. While it's possible for someone to set up a separate RESP for a child, it's often more convenient for friends and family to give the parents money that is specifically earmarked for the RESP. Having the savings all together makes it easier to track CESG payments. Remember, you can't double up on the CESG by opening several RESPs for the same beneficiary!
- Don't forget your other financial goals along the way. Saving for education is important, but there are many other ways of covering educational expenses, including scholarships, bursaries, and part-time or summer employment. There are only so many dollars to go around—your financial planner* can help you to prioritize where those dollars should go.
With the right plan, you can save for your child's education, cover your day-to-day expenses and put away money for retirement. Use the BMO's Education Savings Calculator now to start researching how much you'll need to save for your child's education and see if your current level of savings will get you there.
Let's talk. Call a BMO Financial Planner today at1-888-389-8030
1 (2010, September 16). University Tuition Fees. Statistics Canada. Retrieved March 12, 2012, from www.statcan.gc.ca
2 Subject to special rules governing CESG grants for beneficiaries 16 and 17.
*BMO financial planner refers to Financial Planners, Investment and Retirement Planning that are representatives of BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal.