A financial insider shares her tips to kickstarting your little one’s future.
Michelle Munro is the Director of Tax and Retirement Research at Fidelity Investments Canada. She has over 20 years of career experience and possesses the intel that can help boost your savings and lower your tax bill. Here, she shares real talk about making the most of a Registered Education Savings Plan (RESP).
Don't think you missed the boat
“In a perfect world, you want to start as soon as you can, since government grants are on the table until 17 years of age. But beyond government grants, there’s use to an RESP. A one- or two-year investment will continue to grow on a tax-deferred basis.”
The bottom line: Even if you invest late or only save a little, any investment is a win, because contributions are released tax-free, and there’s always an opportunity for earnings, such as from mutual funds suited to short-term investing. While earnings are taxed, they are typically withdrawn by the student, who is likely making little or no income, so they’ll have to pay little or no taxes. Plus, an RESP can remain open until a student turns 36 years old, so there’s plenty of time to make investment gains, especially if they delay post-secondary pursuits.
Secure the maximum in government grants
“The first thing you want to do is secure the maximum Canada Education Savings Grant (CESG) of $7,200, which requires a $36,000 contribution over the lifetime of an RESP (see below for tips on maximizing grants via timing). Next, ask yourself, ‘How long will my child pursue a post-secondary education? Are they planning a three-year program at a college or going on to post-graduate studies which require rent and travel?’ If you have the money and you think your child is going to need it, it’s a good strategy to contribute the $50,000 limit.”
The bottom line: If you have the means, go for it and contribute the maximum. If your graduate doesn’t spend it all, you can move the remaining funds to a sibling’s RESP or your own RRSP without a tax hit. Click here to learn more about stress-free withdrawal tips.
Consider target date mutual funds as your RESP’s sweet spot
“They provide an asset mix generally in your RESP’s lifespan – that’s often 17 years if you’ve been contributing since your baby was born – with a target date determined by your goals and available budget.”
The bottom line: A target date mutual fund is not just for retirement. Consider it for your child’s education, because it strikes the optimal investment mix within your timeline, aiming to prevent market fluctuations from throwing your balance out of whack and becoming more conservative once you’re ready to withdraw. Think of it as a well-balanced ride that levels out in time for your target date: a few weeks before the first day of school, when tuition, rent and other education costs are due.
Plan your contributions wisely
“Whether you make lump sum or regular contributions, your advisor makes a difference. They can offer sound advice and guidance about funds and rates of return, they consider your investment personality and your financial goals, and they’re trained to help you strategize long-term financial success.”
The bottom line: Time your contributions. If you get a hefty gift from a relative, hold back on depositing it all at once. CESGs are doled out to match yearly contributions, so no annual contribution equals no grant money. It’s best to divide up any large gift and make contributions in other years in order to play catch-up on government grants. You could also opt to save with automated and budget-friendly contributions that will grow and help cover the costs of post-secondary goals. Whatever your path, an advisor can help you personalize a plan that fits your cash flow, risk profile and overall financial mojo.