Education costs continue to climb and even if you start early, your RESP may not cover all your costs. Ian Lebane, Tax and Estate Planner, TD Wealth, talks about other education savings options you need to know about.
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Welcome back. When you think about saving for your child's education, you likely think of an RESP, or Registered Education Savings Plan. You kick in your money, and the government gives you a grant up to a certain amount every year. But an RESP can be tweaked for some ways to think about it, and it may not be right for everyone if you have a lot.
Now here's a look a chart of an RESP. If you start at birth and contribute $2,000 a year with 6% return-- don't argue about the return number. This is just for illustration purposes-- you would have almost $72,000. But the average university degree in Canada can run over $78,000, and that's just for one degree. What if your child wants to go to grad school or study abroad? You may need to look at some other options. So here to give us some of those other options is Ian Lebane. He's a Tax and Estate Planner with TD Wealth and all around smart guy. Nice to have you here.
Oh, nice to be back. Thank you.
So I kind of painted out the scenario. I mean school is expensive. You've got two kids, I think--
I know it.
--one in university, one on the way. Is there anything-- first off, before we get in, how should we use our RESP the best? Because I'm sure there are ways maybe that we're not thinking about.
And it occurred to me when you said $2,000 a year, well, you can actually put in seed money of up to $14,000 and not compromise the ability to get the grants.
Let's start with basics. What is the-- I'll say everyone believes what you're supposed to do?
What everybody typically does is put in $2,500, because the government matches 20% of that, so they give you $500.
Right.
So 20% return, great return.
Immediately. Yeah. But what you're saying is?
The maximum of that is $7,200 of government grants.
Right.
So when you do-- when you work through the math, you need $36,000 to attract that $7,200.
Correct.
That leaves $14,000 left, because the maximum, overall, is $50,000. There's no annual maximum.
Right. So you-- and you get the compounding--
So you get that money sitting in there, and then that $72,000 maybe becomes $100,000 over a 15 or even 20-year period.
And you know, there's been a heck of a lot of compounding over the past few years. So one can hope that it actually happens away. Is RESP still the best way for people to save for education? I mean that grant kind of--
Yeah, I think maximize that first before you look at other things.
Yeah.
And when you want to go to other things, one of the things is when you take out, when the child goes to university, and you're taking out, make sure you take out what's called the education assistance payments, not the capital contribution, because that you want to get out first.
Why?
It's taxable in the child's hands, and they're often at the lowest marginal rate.
Right. So just to be tax efficient when you withdraw.
There's two reasons for that. Usually, they're making less money when they first are in school, and then their upper years of university, they may have jobs and be at a higher tax rate. And then when they're dipping into their contributions, it's tax free. The other reason to do that is if they don't finish school, and you have $30,000 left, and it's your own money back, it comes back to you tax free.
Oh, nice.
If it's still the grant and the interest money or the earnings, then it's taxable.
Is it difficult-- this is very tactical-- when you're pulling that money out, to distinguish between the two, or do you just have to--
You just tell the institution that you have the education assistance payments.
Got it. First, before anything else comes out. Anything else to remember on the RESP?
Yeah, once you take it out, and you have excess, you can put it in your own TFSA, the child can. So don't be shy in taking out-- there's a limit of $5,000 the first 13 weeks. After that, you can go up-- they have some administrative rule. It's something like $23,000.
And the reason you would do that is?
The reason you would do that is that any excess, once the child's 18, they can put in $5,500 in the TFSA.
Right.
So it's a way to augment, because once they take it out and pay their very little tax on it, why not invest in a TFSA?
Right, and start getting it to really work for you on that side, too.
Absolutely.
Wow, that's like a bionic RESP right there.
It is, yep. And then once you've maxed out that, a parent has an option, assuming they have maxed out their RRSP, and they've maxed out that, is they can do a family trust.
OK.
So that's a little bit more involved, and you need some legal advice. And you need, I would say, a million dollars to make it worth it.
Yeah.
But you were talking about how expensive education is, so--
It ticks up, yeah.
If you do what's called a prescribed rate loan, and essentially, that's 1% now, because the rates are still low, lock that in now. Actually, that's a tip, because rates are edging up. And so that rate you get guaranteed as a million dollars. It's a demand loan. The trust pays the 1% back. Any excess can then be funneled out to the children going to school. So that's still a sanctioned-- it's common, if you have that excess money lying around.
And this also could help them for preparation for their accounting degree, I think, that would be coming, too.
Absolutely. Absolutely. And again, if someone has that money invested, if a parent has that money invested, why not have it invested so that the income is taxed at the children's rates? That's all about income splitting, which is getting harder and harder to do.
And could be getting harder and harder to do. We won't get into the federal-- I don't know.
It's a whole other show.
That's a whole other show, the proposals. Let me ask you about-- just there are some situations, where some people may not be able to utilize an RESP. And I was reading that sometimes if, you know, the child isn't a Canadian resident, is that-- I don't know how common that is. Or if they've already maxed out the $50,000 from a beneficiary-- nice problem to have-- any other situations?
Well, I mean then you're getting into the family trust.
Yeah.
One of the reasons that sometimes you can't use an RESP, US citizens have to be careful about this. So sometimes you have one parent that's a US citizen, so sometimes they'll say, well, does that mean I can't do it? Well, an uncle can start it or a grandparent, so you can get the Canadian. It's more important to have the subscriber, the person that starts it as the Canadian. But to get the grants, yes, the child has to be a Canadian resident.
And not to delve down too far the US tax hole, so to speak, but why is it that a US parent couldn't do that for a child?
Because US citizens are taxed based on citizenship, so they have to file US tax returns, and the US simply doesn't recognize and RESP as a tax sheltered account as they do with an RRSP. They have some-- they have their own creature down there called the 529, so they may--
That would be the way. They might do it that way. What about, in terms of-- you mentioned a trust, have to be kind of worthwhile, but what about this non-registered investments? I mean is that kind of--
Yeah, non-registered investments-- again, you can make a gift to your child. Once you're 18, they can invest it, if you trust them with it.
Yeah.
And then the income is theirs. You can also do a trust in the way I talked about and loan the money into the trust, as long as you charge that 1%. Another option is an insurance, and a parent can get what's called a whole life participating policy. So it adds cash value, and then when the child's 18, you can transfer it to the child. Then the child has an asset that they can borrow against. There are some that even pay dividends. So again, that could be a whole other discussion.
Whole different show.
But it's a way to have tax-preferred growth inside an insurance policy. But you have to start that early.
Yeah.
So Kim, you can't be sort of thinking of that when the child is 12 or 13 or 14.
You got to be starting when they're born.
To make that worthwhile, you need to be starting those kind of things right when they're born, and get the 15 or 20-year growth.
Ian, thanks very much.
My pleasure always.
Ian Lebane, he's with TD Wealth, joining me here in studio, Tax and Estate Planner from TD Wealth. Thank you so much for joining us tonight.
Now here's a look a chart of an RESP. If you start at birth and contribute $2,000 a year with 6% return-- don't argue about the return number. This is just for illustration purposes-- you would have almost $72,000. But the average university degree in Canada can run over $78,000, and that's just for one degree. What if your child wants to go to grad school or study abroad? You may need to look at some other options. So here to give us some of those other options is Ian Lebane. He's a Tax and Estate Planner with TD Wealth and all around smart guy. Nice to have you here.
Oh, nice to be back. Thank you.
So I kind of painted out the scenario. I mean school is expensive. You've got two kids, I think--
I know it.
--one in university, one on the way. Is there anything-- first off, before we get in, how should we use our RESP the best? Because I'm sure there are ways maybe that we're not thinking about.
And it occurred to me when you said $2,000 a year, well, you can actually put in seed money of up to $14,000 and not compromise the ability to get the grants.
Let's start with basics. What is the-- I'll say everyone believes what you're supposed to do?
What everybody typically does is put in $2,500, because the government matches 20% of that, so they give you $500.
Right.
So 20% return, great return.
Immediately. Yeah. But what you're saying is?
The maximum of that is $7,200 of government grants.
Right.
So when you do-- when you work through the math, you need $36,000 to attract that $7,200.
Correct.
That leaves $14,000 left, because the maximum, overall, is $50,000. There's no annual maximum.
Right. So you-- and you get the compounding--
So you get that money sitting in there, and then that $72,000 maybe becomes $100,000 over a 15 or even 20-year period.
And you know, there's been a heck of a lot of compounding over the past few years. So one can hope that it actually happens away. Is RESP still the best way for people to save for education? I mean that grant kind of--
Yeah, I think maximize that first before you look at other things.
Yeah.
And when you want to go to other things, one of the things is when you take out, when the child goes to university, and you're taking out, make sure you take out what's called the education assistance payments, not the capital contribution, because that you want to get out first.
Why?
It's taxable in the child's hands, and they're often at the lowest marginal rate.
Right. So just to be tax efficient when you withdraw.
There's two reasons for that. Usually, they're making less money when they first are in school, and then their upper years of university, they may have jobs and be at a higher tax rate. And then when they're dipping into their contributions, it's tax free. The other reason to do that is if they don't finish school, and you have $30,000 left, and it's your own money back, it comes back to you tax free.
Oh, nice.
If it's still the grant and the interest money or the earnings, then it's taxable.
Is it difficult-- this is very tactical-- when you're pulling that money out, to distinguish between the two, or do you just have to--
You just tell the institution that you have the education assistance payments.
Got it. First, before anything else comes out. Anything else to remember on the RESP?
Yeah, once you take it out, and you have excess, you can put it in your own TFSA, the child can. So don't be shy in taking out-- there's a limit of $5,000 the first 13 weeks. After that, you can go up-- they have some administrative rule. It's something like $23,000.
And the reason you would do that is?
The reason you would do that is that any excess, once the child's 18, they can put in $5,500 in the TFSA.
Right.
So it's a way to augment, because once they take it out and pay their very little tax on it, why not invest in a TFSA?
Right, and start getting it to really work for you on that side, too.
Absolutely.
Wow, that's like a bionic RESP right there.
It is, yep. And then once you've maxed out that, a parent has an option, assuming they have maxed out their RRSP, and they've maxed out that, is they can do a family trust.
OK.
So that's a little bit more involved, and you need some legal advice. And you need, I would say, a million dollars to make it worth it.
Yeah.
But you were talking about how expensive education is, so--
It ticks up, yeah.
If you do what's called a prescribed rate loan, and essentially, that's 1% now, because the rates are still low, lock that in now. Actually, that's a tip, because rates are edging up. And so that rate you get guaranteed as a million dollars. It's a demand loan. The trust pays the 1% back. Any excess can then be funneled out to the children going to school. So that's still a sanctioned-- it's common, if you have that excess money lying around.
And this also could help them for preparation for their accounting degree, I think, that would be coming, too.
Absolutely. Absolutely. And again, if someone has that money invested, if a parent has that money invested, why not have it invested so that the income is taxed at the children's rates? That's all about income splitting, which is getting harder and harder to do.
And could be getting harder and harder to do. We won't get into the federal-- I don't know.
It's a whole other show.
That's a whole other show, the proposals. Let me ask you about-- just there are some situations, where some people may not be able to utilize an RESP. And I was reading that sometimes if, you know, the child isn't a Canadian resident, is that-- I don't know how common that is. Or if they've already maxed out the $50,000 from a beneficiary-- nice problem to have-- any other situations?
Well, I mean then you're getting into the family trust.
Yeah.
One of the reasons that sometimes you can't use an RESP, US citizens have to be careful about this. So sometimes you have one parent that's a US citizen, so sometimes they'll say, well, does that mean I can't do it? Well, an uncle can start it or a grandparent, so you can get the Canadian. It's more important to have the subscriber, the person that starts it as the Canadian. But to get the grants, yes, the child has to be a Canadian resident.
And not to delve down too far the US tax hole, so to speak, but why is it that a US parent couldn't do that for a child?
Because US citizens are taxed based on citizenship, so they have to file US tax returns, and the US simply doesn't recognize and RESP as a tax sheltered account as they do with an RRSP. They have some-- they have their own creature down there called the 529, so they may--
That would be the way. They might do it that way. What about, in terms of-- you mentioned a trust, have to be kind of worthwhile, but what about this non-registered investments? I mean is that kind of--
Yeah, non-registered investments-- again, you can make a gift to your child. Once you're 18, they can invest it, if you trust them with it.
Yeah.
And then the income is theirs. You can also do a trust in the way I talked about and loan the money into the trust, as long as you charge that 1%. Another option is an insurance, and a parent can get what's called a whole life participating policy. So it adds cash value, and then when the child's 18, you can transfer it to the child. Then the child has an asset that they can borrow against. There are some that even pay dividends. So again, that could be a whole other discussion.
Whole different show.
But it's a way to have tax-preferred growth inside an insurance policy. But you have to start that early.
Yeah.
So Kim, you can't be sort of thinking of that when the child is 12 or 13 or 14.
You got to be starting when they're born.
To make that worthwhile, you need to be starting those kind of things right when they're born, and get the 15 or 20-year growth.
Ian, thanks very much.
My pleasure always.
Ian Lebane, he's with TD Wealth, joining me here in studio, Tax and Estate Planner from TD Wealth. Thank you so much for joining us tonight.
