As the back-to-school season puts education top-of-mind for Canadian families, financial advisors are presented with an opportunity to remind clients of the post-secondary education savings options available.

Jamie Golombek, managing director of tax and estate planning for CIBC, says it is crucial for families to begin planning early for the costs associated with post-secondary education.

“Start planning ahead for tuition and other educational costs as far in advance as possible to let time make the most of your contributions,” he says.

Golombek points to tax-free savings accounts and registered education savings plans as two of the best savings options for families. While the RESP remains the principal savings and investment vehicle for post-secondary education, he says the TFSA offers a flexible new option to consider.

“Whether post-secondary education is years away or just around the corner, TFSAs and RESPs both offer relative advantages which vary depending upon the contributor’s situation,” says Golombek.

To determine the most beneficial savings vehicle for a client, Golombek urges financial advisors to consider the client’s tax rate, liquidity needs, timeline and the level of education the student will likely pursue.

The main advantage of using a RESP over a TFSA is the potential to augment the plan with additional government money in the form of Canada Education Savings Grants, according to Golombek.

“Parents should generally contribute the maximum amount when possible to their child’s RESP to maximize the CESGs,” he says.

The maximum annual CESG per beneficiary is $500, based upon a $2,500 contribution. If there is unused grant room from previous years, the grant amount could increase to $1,000 per year, per child through additional contributions. The lifetime grant maximum is $7,200.

Other considerations include the fact that RESP contributions are not tax-deductible, but investment income earned is tax-sheltered until withdrawn. Money can be paid out of the RESP as an Educational Assistance Payment when the student is attending a university, college, or other government-recognized post-secondary educational institution. The money is taxed in the hands of the student, usually at a low or even zero tax rate.

The annual RESP contribution limit was eliminated in 2008, allowing benefactors to contribute as much as they can to a child’s plan within any given year, to a lifetime maximum of $50,000.

If no beneficiaries ultimately pursue post-secondary education, the RESP subscriber can get all contributions back tax-free. Any accumulated income can either be contributed to the subscriber’s RRSP if he or she has unused contribution room, or can be paid to the subscriber but may be subject to a high rate of tax. Any grants must be returned to the government.

In comparison, the TFSA allows investors to contribute up to $5,000 annually and invest in cash deposits, GICs, mutual funds and other investment vehicles.

“One of the most compelling advantages of the TFSA is its flexibility. Investors are free from many of the rules and restrictions that apply to other registered savings plans,” says Golombek.

Golombek notes that contributions are not tax-deductible, but funds can be withdrawn at any time, tax-free, for any cause. This allows parents to use TFSA money towards school tuition, at the primary, secondary as well as post-secondary levels.

In addition, funds withdrawn can be re-contributed the following year, with any unused contribution room carried forward from year to year.

Parents who have already contributed the maximum amount to their child’s RESP to achieve the CESG could consider using a TFSA to invest additional money for education in tax-advantaged manner, Golombek notes.

IE