After school lets out for the summer, excitement for upcoming vacation days may be the only thing on your family’s mind. It’s important not to let the promise of sunny days keep you from thinking about your child’s future. You want to make sure a world of opportunity is open to your child, and part of that is planning properly for their education.
You might have heard that it’s never too early to start saving for your child’s education, but are you aware of these common missteps? Here are several mistakes to avoid as you save for the future. Not starting early enough.
The earlier you start to save for education, the better. Some parents even start before their children are born! Allowing money to be invested for a longer period of time naturally allows for larger amounts of income to accrue.
Not using the RESP
The Registered Education Savings Plan (RESP) was designed to help you save for a child’s education. With the federal government offering to pitch in a 20% subsidy for a contribution limit of $2,500, it’s a mistake not to use this program to help you save. The government will contribute for as long as your child is under 18 — up to a lifetime maximum of $7,200.
Investment earnings accumulate and the tax is deferred for as long as the money remains in the plan. The beneficiary—your child—will have to pay tax at the time they withdraw money to be used towards the costs of their education. Since students have a lower tax rate, the costs are lower to them than they would be for you.
Once your children are finished with school, you’ll need to collapse your RESP. CESG contributions are repaid to the government, but you can withdraw the principal and the income. Once you withdraw the income, it is subject to income tax—plus a penalty of 20%. If you have RRSP contribution room, RESP income can be rolled into your RRSP without penalty, so consult with an investment counsellor before acting.
Not accounting for increasing costs of education.
The cost for a engineering degree today will not be the same cost in five, ten, or fifteen years—or whenever your children are ready to pursue post-secondary education. Increase your investments and contributions so the amount you are setting aside rises in tandem—or better than tuition costs. This way, there will be enough when it is time to pay for school.
The same logic applies to other educational costs, such as books, fees, rent or dorm costs, and transportation. We can expect costs to rise—and can plan accordingly.
Underestimating how much money you’ll need.
It can be difficult to anticipate what kind of subjects your child will want to study, especially if you start saving when your child is just a baby. Some degrees cost more at different post-secondary institutions, so choosing business over science could influence the cost factor by a few thousand dollars each term. Further study also adds up, so setting aside more money helps if your child dreams of going into law or medicine.
In addition to what’s going to be studied, think about where your child might be accepted! There are many great institutions across the country, but the costs go up for out-of-province tuition. Education will cost more if your child decides to study in a different part of Canada.
If you save more than is needed to cover education costs, you can always turn it into another way to help your child plan for their future. If you’ve used an RESP, keep the penalties in mind. It may be best to discuss your child’s plans early to make sure you are saving the right amount.
Avoiding these mistakes will make saving for post-secondary education painless. You’ll be able to send your child off to school without worrying about excessive student debt.
