Saving for post-secondary education
by Jamie Golombek
While having dinner with a friend last December, the topic of Registered Education Savings Plans came up. Rick, an MBA graduate, works in the financial services industry and has three kids, John (6), Ben (3), and Sam (1). I've always considered Rick to be an astute investor, well versed in financial matters, so I was surprised when he told me that he had not yet opened an RESP for his three sons.
When I asked him why, he said that his first priority was to maximize his RRSP contributions and then to pay down his mortgage. Only now, since his mortgage was paid off, was he beginning to look into the RESP. But he confided that he was somewhat disappointed that in choosing to delay opening an RESP, he had missed out on the maximum Canada Education Savings Grants (CESGs) available for John and Ben.
The CESG catch-up opportunity
Imagine his excitement when I informed him that the CESGs are retroactive to 1998 and, by following an aggressive RESP contribution catch-up plan, he could collect all the CESGs for each of his sons. The catch-up is somewhat limited by the annual $4,000 maximum contribution per child, but by following the strategy below, by 2009, Rick will be fully caught up. Note that I'll assume that the CESG is 20 per cent of the first $2,000 per year per beneficiary (the increased CESGs for lower income families are discussed below).
The strategy
I recommended the following RESP contribution strategy to Rick in December:
Contribute $12,000 in 2004 - receive CESGs for all three kids for 2004 and 2003
Contribute $10,000 in 2005 - receive CEGSs for all three kids for 2005 and for John and Ben for 2002
Contribute $10,000 in 2006 - receive CESGs for all three kids for 2006 and for John and Ben for 2001
From 2007 to 2009, contribute $8,000 - receive CESGs for all three kids for 2007 to 2009 and for John for 2000, 1999 and 1998 respectively.
Just like Rick, many Canadians are simply unaware of the opportunity that exists to go back and collect prior years' CESGs. This is a huge opportunity for advisors to provide valuable advice to help their clients save for post-secondary level education.
Increased CESGs for low- and middle-income Canadians
The 2004 federal budget introduced changes to the CESG matching rate for contributions made to RESPs by low- and middle-income families beginning this year. For children under the age of 18, the first $500 contributed to an RESP in the year will be eligible for a 40 per cent CESG if the child's family has a net income of $35,000 or less and a 30 per cent CESG if the child's family's net income is between $35,000 and $70,000. Any contributions above the first $500 will continue to attract the normal 20 per cent CESG.
Under the rules, a family's net income is the same net income that is used to determine eligibility for the Canada Child Tax Benefit for January of a particular tax year, which is the family net income for the second preceding calendar year. So for 2005 eligibility, the family's 2003 net income would be used.
Note that to encourage regular contributions to an RESP, the enhanced CESGs will only apply to a maximum of $500 of contributions per child in any given year. In other words, unlike the normal CESG room, there is no carry-forward of unused access to the enhanced CESG.
As a result of the new rules, a low-income family contributing $2,000 in a year could receive a CESG totaling $500, comprised of 40 per cent CESG on the first $500 ($200) and 20 per cent on the remaining $1,500 ($300).
If a child from a low-income family has accumulated unused CESG contribution room from prior years, a subscriber could contribute up to $4,000 to the child's RESP in a year and will receive a CESG of $900 in a year, consisting of 40 per cent on the first $500 ($200) and 20 per cent on the remaining $3,500 ($700).
Provincial CESG programs
Last year's federal budget also opened the door to allow provinces to implement education savings incentive programs that are similar to the CESG. So far, Alberta has led the way through its introduction of the Alberta Centennial Education Savings Plan. Under this plan, Alberta will contribute $500 to the RESP of every child born to Alberta residents in 2005 and beyond, with subsequent grants of $100 available to children attending school in Alberta at ages eight, 11 and 14, starting with children born in 2005. Perhaps other provinces will take the lead from Alberta, enshrining RESPs as the vehicle of choice for post-secondary education savings.