The $$$ Maker Report
Bi-Monthly Investments Newsletter by Karl
Jung, CLU SEPT/OCT 1999
Gibsons
office: (604) 886-2691 Cellular: (604) 760-9899 Fax:
(604) 886-3014 kjung@dccnet.com
RESPs
vs. "In Trust" Accounts
Saving for your Child's Education
Parents and grandparents alike are concerned about making the best choices for their loved ones. Savings can be accomplished in a number of different manners, but each product has its own set of advantages and disadvantages. The adage "Buyer Beware" still applies to many financial products, and Educational Plans are no different. Here's a summary of the major forms of financing a child's future education:
Pooled Scholarship
Trust Funds
For years the Canadian Scholarship Trust Fund and the University Scholarship of Canada were the major players. They accomplished this by allowing parents to contribute small amounts of cash on a monthly basis to buy "units" or shares in the Trust Fund. Another advantage to consumers was that the principle was guaranteed to be repaid to the contributor should the child not go to college or university. Criticisms of such plans were that some do not pay any interest back to the parents should the child not continue with his/her education. The child was not guaranteed to receive the disbursement in a given year since only so much money was released per year. There were restrictions on changing the beneficiary and determining exactly how much money was going to be available in any given year. This form of funding has taken a lesser and lesser role in the overall total funding options available as time passed.
Self-Directed RESPs
Whether done through a broker, buying individual stocks, bonds or through Mutual and Segregated Funds, the new amended RESPs have become more popular. Although the money can be used only for educational purposes, some of the principle and interest can be returned to the contributor should the child not go on for future education. One downside exists. If the child does not go to school, the grant must be repaid. Based on how much RRSP room is available in the contributor's RRSP, some of the unused money can be transferred back tax-free, the rest is taxable.
The growth on RESPs is tax deferred until the child uses the money and pays tax accordingly in that year, otherwise it goes back to the contributor (or into their RRSP if room is available). An annual limit of $4000 is available for each child and the contribution is not tax deductible.
One attractive feature is the new Canada Education Savings Grant (CESG), which adds up to 20% on the first $2000 annual contribution. In effect, the investment will have a $400 contribution made on behalf of the government if you contribute at least $2000 a year. Specific rules and ages exist for the grant.
