Save for your child’s education or you might live to regret it

Over half of Canadian parents are leaving money on the table when it comes to saving for their child’s future education costs, and they regret it later.

According to recent data from Ipsos, parents are simply not taking full advantage of the federal and provincial grants for their child’s Registered Education Savings Plan (RESP) and this free money will grow by thousands of dollars when it’s invested properly.

We’re not talking about small dollars, either.

Federally, there is up to $7,200 of free money available through the Canada Education Savings Grant (CESG), and lower income households could receive an additional $2,000 through the Canada Learning Bond (CLB). In some provinces there are additional dollars, which may or may not be dependent on income.

An RESP provides for tax-deferred investment growth and is a fantastic tool that allows a parent, grandparent, friend or legal guardian to save money for a child’s post-secondary education. To set this up all you need is a Social Insurance Number (SIN) for the child and an appointment with an RESP provider.

Education is a massive cost ... and the biggest gift you can give

Educated people earn more, are happier and enjoy a better quality of life. That’s why education is one of the greatest gifts you can give your children.

But a newborn today will likely pay more than $100,000 for post secondary education in 18 years.

But, with good RESP planning, and by taking advantage of the grants available, parents can prepare for some or all of the costs.

Also, studies have shown that when a parent opens a savings plan for their child’s education, and they steward their child towards that goal, even if the savings plan has very little in it, it increases the likelihood of that child going to post-secondary school, exponentially.

Breaking down the biggest grant

In Canada, if your child is under the age of 16, they qualify for free government money through an RESP.

Each year the government matches 20 per cent on the first $2,500 contributed annually to an RESP, so $500. Every child qualifies for a total lifetime CESG contribution of $7,200. The CESG is available up until the end of the calendar year in which the child turns 17.

As the contributor, you have a total lifetime contribution limit into your child’s RESP of $50,000. If you contribute the maximum of $50,000 all at once, you’d only collect $500 because that’s the maximum contribution the government will make each year.

Although you cannot deduct the contributions made to an RESP from your taxable income, the subsequent investment earnings on RESP contributions are tax-deferred. If the plan earnings are withdrawn to cover qualifying post-secondary education expenses, they are taxable to the child, not you, the contributor. You can contribute to an RESP for up to 31 years, and the plan can remain open for a maximum of 36 years.

Taking full advantage of the CESG grant

Many Canadians choose to contribute in smaller instalments to an RESP because weekly, biweekly, monthly, or annually allow them to collect as much of the CESG as possible and, let’s face it, it fits much better with our budgets.

Let’s say that you want to take full advantage of the CESG grant and choose to invest $2,500 per year from the moment your child is born (so, the CESG adds another $500 annually until you reach the maximum of $7,200). If your investments earn on average five per cent for 18 years, net of fees, the RESP would be worth about $81,000.

Wow, that’s some serious growth!

Parents have regrets when they don’t save for their child’s education

When polled, after their kids have left the nest, parents who didn’t plan and save well for their children’s education wish they had done something differently in their day-to-day budgeting to save more.

Listen, if you haven’t been saving $2,500 each year in your child’s RESP, and they are still eligible, it’s not too late. You actually have unclaimed CESG! This means you can catch up by putting a little extra into your RESP and receive up to $1,000 in grants (to get that full $1,000, you’d need to put in $5,000 in one year).

My advice is that if education is a priority for you and your family, take a look at your budget and see what you can do to find money for regular contributions. It’s a life-changing gift for your children, and you can even start saving in super small increments.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.