Covering the cost of education today is no laughing matter. With tuition rates on the rise, and more and more jobs requiring a post-secondary education, adding up the costs can be a major stressor. However, opening a savings account can help you stash away some cash to help cover the costs, and give you peace of mind that when the time comes your children, or even yourself, will have some financial stability to pursue further education. Let’s explore some of the savings plans I can offer you as an accredited financial advisor to help you save for your investment in schooling.
An RESP is a Registered Education Savings Plan, which is basically a non-taxed account that helps you accumulate savings for your child’s post-secondary education. A great feature of an RESP is that the money remains untaxed until the child withdraws it, and there are very few stipulations for any contributions. The Canadian government allows up to $50,000 per child, per lifetime to be contributed to an RESP, and this investment option offers many additional grants. For example, low income families can receive up to $2,000 per child, and in some cities like Ottawa, each child registered for an RESP can quality for an additional $500.
While an RESP can be opened for anyone under the age of 36, there is a catch if it goes unused. If a child chooses to not pursue a post-secondary education, the money contributed will be returned, but with a tax of 20% on all interest and dividends as a penalty.
With a TFSA, or a Tax-Free Savings Account, putting money away for your child’s education is a little different. Much like an RESP, the account is sheltered from the tax-man until it is used, but there is a little more leniency when it comes to contributions.
Parents can contribute up to $5,500 per child, per year, and can withdraw it at any given time, tax free. This type of savings account gives you the most bang for your buck, as you get a great return on your investment, and it is both accumulated and withdrawn tax-free, unlike an RESP. However, with a TFSA you are no longer eligible for the perks of government grants like an RESP offers.
The major downfall to a TSFA is that the easy access can make for spending temptations. Since there is no penalty for taking money from the account, it is easy to dip into when you’re short on cash. Self-discipline can be tough, especially when it comes to making sure you reimburse any money you withdraw from the account.
Dipping into your RRSPs, or your Registered Retirement Savings Plan, in order to cover the cost of education is also an option. For those who have invested in an RRSP, they are eligible for a government program known as the Long Learning Plan, or LLP. Basically, an LLP is an interest-free loan used to finance your own education, or the education of a spouse or common-law partner.
Under the rules of the LLP, you can withdraw up to $10,000 per calendar year from your RRSPs, with a maximum total of $20,000. While you must repay your RRSP withdraw within 10 years, you can qualify for the loan more than once, provided you have repaid the initial withdraw from your RRSP account and have knocked your pay-back balance to zero.
The major stipulation with an RRSP is that you cannot use the money towards the education of a child. However, if you are considering returning to school yourself, dipping into your RRSP can offer a helping hand in covering costs.
Whether you’re sending yourself or your children to obtain post-secondary education, the cost can be concerning. The trick is to plan for the future, and consider all your options. Weigh the pros and cons of each type of savings plan, and remember that you are free to prioritize your own finances. If you have any questions about opening an RESP, TFSA or dipping into your RRSPs, don’t hesitate to give me a call at 705-315-0156 as I am always happy to help you financially plan for the future education of both you and your family.