Seven ways to help clients save for their children’s education

Taking advantage of the key benefits of an RESP and sticking with the plan are fundamentally important

By: JoAnne Sommers
August 13, 2010 October 31, 2019
11:41

A good education is one of the most important gifts any parents can give their children. It’s also one of the most expensive.

Here are some ways you can help clients save for the increasingly high cost of a post-secondary education:

Start early
Saving for post-secondary education should begin as soon as a child is born, says Cathie Hurlburt, a senior financial planning advisor with Assante Financial Management Ltd. in Vancouver.

RESPs are the vehicle of choice for most Canadian parents. That’s because in addition to tax-deductibility, contributions attract the Canada Education Savings Grant.

To open a plan, parents need to obtain a social insurance number for the child. They can do that by applying at any Canada Service Centre and bringing the child’s birth certificate.

Contribute as much as possible
Ideally, parents should contribute at least $2,500 annually, which will attract the maximum annual CESG of $500 ($7,200 lifetime per child). The money enjoys tax-free growth while investments remain in the RESP.

Ask family members and friends to contribute
Ask family and friends to give gifts in the form of cash. Over time, even small amounts make a difference. In addition to parents, grandparents, aunts, uncles and siblings can all contribute tax-free to an RESP.

Set up a family RESP
Even if the family has only one child, set up a family RESP plan rather than an individual plan. This provides greater flexibility when it’s time to make withdrawals. If the family later has a second or third child who doesn’t want to attend college or university, the remaining children can withdraw more money from the RESP than if they had individual plans.

Investment mix
Time frame is a major factor in determining the appropriate investment mix: the more time parents have to save for a child’s education the more aggressive they may want to be. On the other hand, how much risk do they want to run given that the money is earmarked for something so important?

“A mix of equities and fixed-income products is probably appropriate for most RESPs, at least in the early stages,” says Frank Wiginton, a certified financial planner with TriDelta Financial Partners Inc. in Toronto.

To save on management expenses, he recommends low- or no-load, or F-class, mutual funds: “[Toronto-Dominion Bank] has new funds with low [management expense ratios] that mimic the index, which are a great low-cost alternative.”

Make lump-sum contributions
If possible, the client should make large lump-sum contributions to the RESP. If, for example, he or she contributes the lifetime maximum of $50,000 when the plan is set up and it grows at an annual rate of 6%, there would be $142,000 for the child’s education after 18 years. By comparison, if they contribute $2,500 annually for 18 years (a total of $45,000), thus attracting the maximum $500 annual CESG, at a 6% annual rate of return they’d have $92,716.

As well, you should discourage clients from diverting money away from the RESP, no matter how strongly they’re tempted. The key is to establish a plan and to stick to it.