Planning Your Child's Future
One of the greatest wonders of a newborn is that a whole world of opportunity is open for your baby to grow into.
And one of the greatest challenges you face as a parent is keeping the world open to him or her, no matter what happens along the way.
Post-Secondary Education Planning
When your baby is just learning to smile and grasp your finger, university education may seem too far away even to contemplate. But if you want to fund your child’s education, you'll need to amass a large amount of money. By planning ahead, you can provide a much wider array of education options.
In Canada, undergraduate students will pay an average of $4,724 in tuition fees for the 2008/09 academic year, up from $4,558 the year before. In 15 to 20 years, the cost of four years of education is estimated to run between $75,000 and $100,000 for a student living away from home.
Start a university fund as soon as you can for your child. The power of compound interest means a small amount invested 18 years in advance will grow much more than a larger amount saved a year or so before it's time for university.
$100 a month can grow to $33,978 by the end of 15 years
(assuming an 8% effective annual rate of return).
Creating a reasonable education savings program starts with forecasting a rough amount that you need to save for tuition at a post-secondary institution. Then estimate the cost of other education-related expenses, such as books and living costs, if you anticipate your child living away from home. From there, you can determine how much you'll need to tuck aside on a weekly, monthly or yearly basis. Because your savings will grow through investment earnings, you might get a more accurate figure if you use the Education Savings Calculator on Human Resources Development Canada's website.
If the numbers are overwhelming, remember that the cost of your child's post-secondary education won't necessarily fall to you alone. It's reasonable to expect that your child can contribute to the total through part-time or summer employment, grants, scholarships and bursaries.
Canadians save for their children's post-secondary education in a variety of ways. In some cases, they simply make their children's education an imperative part of the plan for their own future savings vehicles.
An informal trust (or an in-trust account) is an investment account opened on behalf of a child. Money is saved through contributions that a designated trustee manages on behalf of the child until he or she reaches the age of majority. Funds in an informal trust can be channeled into investments, and there is no restriction on the amount you can invest. Upon reaching the age of majority, the child can choose to use this money for purposes other than education.
You can also set up savings or investment programs —where funds are invested in GICs, bonds, mutual funds, etc. — in your children's names.
But the most popular education-savings tool for Canadians is a Registered Education Savings Plan (RESP).
An RESP is a government-sponsored savings vehicle designed specifically for education savings. Its greatest benefits are that it's tax sheltered (meaning the money inside an RESP can grow without being subject to taxation), and that the federal government will kick in a few dollars of its own to your child's RESP (you can get 20% of the first $2,000 in annual contributions until the child is 17; there's a lifetime limit of $7,200 in grants available per child).
But RESPs are not tax deductible, so they don't possess the same income-reducing powers at tax time as RRSPs do. And if your child doesn't choose to pursue a post-secondary education, there are limits on how much of the plan you can access.
Canadian parents (or grandparents, or anyone else with an interest in saving for a particular young person's future education) can put up to $4,000 a year, per child, into an RESP. There's a lifetime limit of $42,000, and contributions must end no more than 21 years after the year the plan was opened.