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Do you have kids in college or at university and have discovered you underestimated the cost and wish you’d saved more?
You aren’t alone. A recent survey for Canadian Imperial Bank of Commerce (CIBC) shows that while eight out of 10 Canadian parents claim they have a good understanding of the costs associated with a post-secondary education, almost 75% don’t really grasp the actual cost of tuition.
What’s more, almost 40% of respondents admit they don’t know what to budget for their children’s non-tuition costs, such as books, accommodation and living expenses. And many fundamentally don’t know how Registered Education Savings Plans (RESP) work, although many have set one up for their kids.
The poll showed that:
“With parents not really knowing what the costs are, it’s not surprising that so many students end up treating their parents like ATMs once they’re in school,” said Kathleen Woodard, Senior Vice President, Retail and Business Banking, CIBC. A CIBC poll in August 2015 found that more than half of post-secondary students tapped their parents for additional financial support while at school because they ran out of money.
The recent poll found that 39% of parents with children enrolled or recently graduated say it cost them more than expected, while 46% admit that in hindsight they should have started saving earlier.
In reality, it can cost at least $100,000, or $25,000 a year, for one child to go away to college or university for four years, Woodard says. Financial advisers generally say it’s important to start early and put aside as much as possible.
Not only are parents surprised by these costs, they lack a fundamental knowledge about the RESPs they set up to save for their kids’ post-secondary education. While 76% of parents have an RESP,
If you have children you hope will pursue a post-secondary education and you want to help, here are RESP basics to help get you started:
There are two parts to an RESP:
1. Contributions, which are the amount you put into the plan, and
2. Accumulated income, which encompasses everything else, such as grants, capital gains, interest payments and dividends.
When you make a withdrawal, specify whether you want it to come from contributions, accumulated income or both. Contribution withdrawals can be sent to you or the student. Those from accumulated income generally must be sent to the student unless he or she agrees the money can go to someone else.
1. They’re taxable in the student’s hands (contribution withdrawals aren’t taxed). Most students may owe little or no tax, including on summer and part-time jobs, as they generally have low incomes and are entitled to various tax credits.
2. There’s no withholding tax. It’s up to you to keep track of the tax due. Your RESP provider will issue a T4A slip for any distributions during the year.
3. The government generally restricts withdrawals for full-time students to $5,000 in the first 13 weeks of a program. There are no limits after that if the student remains enrolled. Withdrawals for part-time students are limited to $2,500 for every 13-week enrollment period (there are no limits on contribution withdrawals).
4. Withdrawals must be used to further your child’s post-secondary education. But this includes tuition, fees, textbooks and reasonable costs for moving, rent, food and transportation. Your RESP provider generally determines what are considered reasonable expenses.
5. For both full- and part-time studies, payments can last for as long as six months after the end of a student’s enrollment, if your plan allows this.
Withdrawing from an RESP isn’t as convenient as withdrawing from your chequing account. Consider taking out enough money to keep the student going for awhile. But you may want to provide the money in regular payments rather than a lump sum, as your student may not be as financially savvy as you. If the student is in a co-op program and has two work terms and one school term in the year, it may make more sense to withdraw contributions rather than accumulated income in that year.
Important note: One smart move is to deplete accumulated earnings first. Contributions remaining in the plan are yours to use as you wish. You can transfer them to another child’s plan or withdraw them for personal use.
If there’s accumulated income left in the plan, you may have to refund some CESG funds. You may have to repay CESG money in other situations, too, such as when a beneficiary doesn’t pursue higher education or the plan is terminated.
The government adds the grant money to your RESP. The basic grant gives 20% on every dollar you contribute, up to a maximum of $500 on an annual contribution of $2,500. That’s 20 cents on every dollar. Contributing at least $2,500 for each child will maximize the grants.
Grant room accumulates until December 31 in the year a child turns 17. If you can’t make a contribution in any given year, you can catch up in future years.
Depending on your net family income, you could receive an additional CESG, but if your family’s net income exceeds $90,563, you aren’t eligible. Keep track of the CESG money; you’ll have to repay any money exceeding the $7,200 lifetime limit.
There are no annual limits on your contributions, but there’s a lifetime limit of $50,000 for each child. And keep in mind that various provincial governments also have incentives for education savings that are administered through RESPs.
If your child doesn’t want to pursue a post-secondary education, you have options for what to do with the money. Some may involve costs and tax consequences. Here are six possibilities:
1. Keep the RESP open for awhile. In a year or two, your child may decide to go to school after all. An individual or family plan can stay open for 36 years — 40 years for beneficiaries eligible for the disability tax credit.
2. Transfer money between individual RESPs for siblings tax-free (including any CESGs) if the child who benefits was under age 21 when the plan was opened. You may also have the option of transferring the money to another beneficiary, but consult with your financial advisor about this option and be sure you don’t over-contribute.
3. Pay for the education of another child in a family RESP.
4. Change beneficiaries or transfer the plan to another beneficiary if you have a group plan that allows this.
5. Transfer as much as $50,000 tax-free to your Registered Retirement Savings Plan (RRSP) or a spousal RRSP if:
6. Transfer the RESP to a Registered Disability Savings Plan on a tax-deferred basis if certain conditions are met. Any CESG money would have to be repaid to complete the transfer.
Of course, you could collapse the plan and the contributions would be tax-free. You would have to refund all grants and the accumulated income would be added to your gross income and taxed in your hands as ordinary income at normal tax rates — plus an additional 20%.
All of the complexities of RESPs go beyond the scope of this article. It’s in your best interest to consult with your financial advisor about the best strategy for making withdrawals.
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