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Education Savings

How to pay for a child's schooling By Tim Cestnick

My kids are going to university. Why? Because I want them to be like their mother. This morning, while drying her hair, Carolyn managed to scrub the sinks, clean the mirror, organize the drawers and brush Michael's teeth all at the same time. She obviously took Multi-Tasking 101 in university. I missed that course. I can do exactly one thing at a time. I want my kids to take that course.

So, how are we going to pay for postsecondary education? We're saving. Consider a few of the options:

Option 1 The 2007 federal budget opened the door to making larger lump-sum contributions to a registered education savings plan (RESP) than ever before. In fact, it's possible to make up to $50,000 in lifetime RESP contributions for a beneficiary, and you can now make that contribution all at once if you want. If you were to make the maximum $50,000 contribution to an RESP for a newborn child today, the value of the RESP at age 18 would be $201,800, assuming an 8-per-cent return annually.

In this case, the child will be entitled to $500 of Canada education savings grants (CESGs) in the year of the contribution, but no CESGs after that because there will be no more RESP contributions.

Option 2 A second option is to invest the $50,000 in a nonregistered investment account for your child's education, and transfer $2,778 annually from that account to an RESP for the child each year for 18 years. Basically, you'd be contributing the $50,000 to the RESP equally over that 18-year period. The advantage of this option is that the child will receive $500 of CESGs each year until the maximum $7,200 in CESGs has been paid into the plan.

The result? The value of the RESP at age 18 in this case would be $130,820, but you can add to that $82,420 of savings still in the non-registered account (net of taxes paid when liquidating to contribute to the RESP), for a total of $213,240 (assuming the same 8-per-cent return). The CESGs do make a difference. Just be sure to invest in equities for tax efficiency in the non-registered account.

Option 3 What if you don't have $50,000 to set aside today? You could borrow the money. If you borrow the $50,000 today (an 18-year loan at 8 per cent; loan payments of $437 monthly) and contribute the entire $50,000 to an RESP, you'll have the same amount in the RESP at age 18 as in option No. 1 but you'll have paid $44,495 in interest costs, so the net benefit at age 18 would be $157,305. The interest costs would not be deductible since you'd be borrowing to invest in a registered plan.

Option 4 Finally, what if you borrowed the $50,000 today (same 18-year loan at 8 per cent), invested it in a non-registered account and transferred $2,778 from the non-registered account into an RESP each year for 18 years? In this case, you'd have the same amount in the RESP and nonregistered account as you would under option No. 2, but you will have paid interest costs of $44,495, part of which would be deductible since you'd be investing outside a registered plan. The net benefit after 18 years would be $182,320.

The bottom line? It appears best to set aside money today in a non-registered account, and drip $50,000 into the RESP over time to take full advantage of the CESGs. Borrow if you must, although the net benefit will be lower.

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