written by Mathieu Sabourin | April 23, 2014
Even before my children were born, one of my concerns has always been to pay for their education. My parents paid for mine, and it is very important for me to do the same for my children. Although university is still a long time away (my son Zakary will be five soon and my daughter Rose turned two in March), I started saving when they were born.
In Canada, we are fortunate to have the Registered Education Savings Plan (RESP), through which the government helps us in our efforts as parents, grandparents or guardians.
In a nutshell, here is how it works: by depositing $1,000 into an RESP, the account will be credited with a federal Education Savings Grant worth $200, and a provincial grant worth $100. If you deposit the annual maximum of $2,500, you will receive the maximum grants of $500 and $250, per year and per child.
When the time comes, it’s the student who will be taxed on withdrawals of Education Savings Grant funds and any accumulated income in the account. As a result, very little tax will be paid on these amounts, since students usually have a modest income. In addition, the capital can always be withdrawn tax free. See more details on RESP guidelines.
That’s all very interesting, but how much should I set aside each year to make sure my kids will have enough?
By depositing $1,000 per year for 18 years at a rate of return of 3.75%, I find myself with approximately $27,500. A student will need around $ 5,000 (in today’s dollars) annually for four years, meaning there will be some $6,000 left in the account at the time of graduation. This $6,000 would revert to me tax-free since it is a return of part of the capital I invested. So I invest $12,000 to fund $20,000 (in today’s dollars) of tuition fees. Interesting!
What happens if I deposit a little more every year, say $ 2,000? After 18 years there will be approximately $67,000 in the account. After paying four years of tuition fees at $ 6,500 per year (a little more than in the previous scenario because I want to make sure that the taxes are paid by the student at a much lower rate than the one that would apply to me), that will leave me with $36,000 that I can withdraw tax-free because this happens to be the exact amount that I invested over the years.
So I just funded four years of university education for free, and free just happens to be my favourite price! Sign me up!
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