Provide The Key To A First Class Education

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Canadians with a university Bachelor level degree earn 50% more than someone with a high school diploma. …

Canadians with a university Bachelor level degree earn 50% more than someone with a high school diploma.

The question is – did these individuals have a plan to pay for their education or are they still paying for it now?

Let’s take a closer look.

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  • You want to do all you can to provide your children and grandchildren with opportunities to succeed – to afford the college or university of their choice, follow the career they dream about and attain maximum earning power. A post secondary education will undeniably help them get there. Did you know that there are many options to help fund this education? You may be confused about what to choose. Today, we’re going to learn about many smart education savings ideas to expand your children’s future educational prospects. Note to Consultant: Please insert your name, title from your business card and the name of the dealer on the slide. The dealer name under which you present yourself will differ, dependent upon whether you are licensed with Investors Group Financial Services Inc. (Mutual Fund Dealers Association - MFDA) or Investors Group Securities Inc. (Investment Industry Regulatory Organization of Canada - IIROC). If you are licensed through the MFDA , you must use this dealer name on the slide: Investors Group Financial Services Inc. (use in Canada outside Québec) Investors Group Financial Services Inc.,  Financial Services Firm (use inside Québec) If you are licensed through IIROC , you must use this dealer name on the slide: Investors Group Securities Inc. (use in Canada outside Québec) Investors Group Securities Inc.,  Firm in Financial Planning (use inside Québec)
  • Before we jump right into this presentation and begin discussing education planning, I want to take a minute to go over some of these key points. It is important to me that you are aware of these details before we start – details that I hope all advisors are talking to you about. First, we are going to be talking about many ideas today but, before you decide to act, it is critical that we review your specific situation. Everyone is different so what works for some may not be as applicable to others. Second, this is what I do for a living. If we decide in the future to work together it is important to me that you are aware of how investments and plans work, any fees that might be associated with them, and how I get paid. We have plenty of material that I can share with you that spells it all out very clearly. (Go over disclaimers) Now that we’ve gone over that, let’s begin by going over our objectives for today… Note to Consultant: If you are licensed with Investors Group Financial Services Inc. (Mutual Fund Dealers Association – MFDA) use line one of the disclaimers listed above. If you are licensed with Investors Group Securities Inc. ( Investment Industry Regulatory Organization of Canada - IIROC ) use line two of the disclaimers. Delete the dealer line that is not applicable. If there is a guest speaker insert the following disclaimer on this page: Views expressed by guest speakers may not be shared by Investors Group.
  • Let’s learn more about each of these points.
  • Canadians with a university Bachelor level degree earn 50% more than someone with a high school diploma. Canadians with a trade or college diploma earn up to 15% more than someone with a high school diploma. The impact of this additional earning potential makes it clear that a post secondary education has become vital for young Canadians. According to the 2006 Census, 6 in 10 Canadians now have a post-secondary degree. The question is – did these individuals have a plan to pay for their education or are they still paying for it now? Let’s take a closer look.
  • Let’s assume tuition costs go up 5% a year. What could your child’s tuition be in 10, 15 and 20 years? (reference table on the slide) And, what about the costs of apprenticeship and skilled trades training? If your child enters an apprenticeship program, they will spend part of their time in class and part of their time in on-the-job training. Students may have to pay for class time, tools and equipment. Today, class costs can range from $200 to $800. For those of you who have just had children or are just about to have children, that 20 year number can look a little scary. And remember, that’s just the tuition or class cost. When you add on other education costs and living expenses, the number can become staggering. The Canadian Foundation for Economic Education (CFEE) reports that university students who live at home spend, on average, $4,000 per year on ‘non educational items” and that those who live away from home spent, on average, $11,000 on ‘non educational” items.
  • Let’s take a look at the Khans family. When we add all of those costs up together, you see a much clearer picture of exactly how much an education can truly cost. If you are like most people, the total figure shown on the slide is likely a bit of a shock. Even if you completed post-secondary education yourself, the numbers just can’t be compared. You may wonder how you will ever be able to pay all those costs. Statistics Canada (2005) has reported that 57% of Canadian college and university graduates leave school owing money for their education - mostly in the form of government student loans. The average debt level is over $18,000. 27% of those who borrowed, graduated with a debt load of $25,000 or more! And for parents, it can be equally difficult to come up with the necessary education financing without going into debt or having it affect your own retirement plans. Accumulating the debt also influences the length of time it takes for graduates to become financially independent. A 2009 Investors Group survey showed that 6 in 10 baby boomer parents are providing financial support averaging $3,675 per year to their adult children. It’s natural to help your children/grandchildren as they start out on their own, but your own plans must be considered. This clearly indicates the importance of planning to save for your child’s or grandchild’s post secondary education. Being here today is a great step toward managing these costs.
  • As you can see, there are six basic ways to fund a post secondary education. Your current income at the time your child is in school. Your child may work either part-time during the school year, full-time in the summer months or both to help fund their education. They may even start working and saving while in high school. There are a number of awards, scholarships and grants available to students. Student loans. Borrowed funds from family such as grandparents or friends. And, your personal savings. In many cases, a combination of all six could be required to cover the many costs we’ve mentioned. To decrease the reliance on income or borrowing the rest of this workshop is focused on the final method - plan and save the money.
  • Here are several potential methods of saving for a child/grandchild’s post secondary education. You may decide to pursue one or more of these methods depending on your situation. Let’s go into the advantages/disadvantages of each.
  • The first option is also the most obvious – i.e. you can save your own money in your own name, pay taxes on it as it grows, and then decide what to do with it whenever you want. You can choose to spend it on your child’s education, or you can choose to spend it on yourself, whether a vacation, or home renovations, or any other expense. So long as you invest it directly in your name, and do not attempt to call it a “trust account” or similar, it will remain your money, under your control. The downside of course is that you have to pay tax on the investment income and capital gains, but you may consider this to be a small price to pay to retain that control.
  • Parents can set up an investment account in the child’s name, also known as a minor account. A grandparent can’t generally set up a minor account, but if a parent has established the account and gives permission, a grandparent may contribute to it. Go through Advantages and Disadvantages Note to Consultants: *In most provinces, and territories, minor accounts are frozen. Redemptions and/or transfers are either prohibited, or only permitted under certain specific circumstances. For the rules in each province, see the Tax & Estate Library, Minor accounts, under “Transaction restrictions on minor accounts.” A formal trust is a trust in which the terms and conditions for the use of the trust property (in this case, money) are put in writing . Go through Advantages and Disadvantages This strategy is recommended if there is a significant lump sum being put aside to fund a child’s education at one time - usually $25,000 or more. The terms of the trust should specifically address whether the trustee can use the trust funds to make RESP contributions on behalf of a trust beneficiary. An informal trust is a trust for which there is no documentation in writing . Frequently, a parent/grandparent will establish an investment account with a financial institution in their name but labeled “in trust” for the child. The parent/grandparent usually funds the investment accounts. Go through Advantages and Disadvantages Informal trusts by their nature lack clarity. Because the terms of the trust are not in writing, everything has to be inferred. Just because the words “in trust” appear on the account doesn’t mean that a trust relationship truly exists. If a trust doesn’t exist, then nothing has been achieved. The difficulty with informal trusts is in proving that a legal trust is present, which may require a costly court application. If a trust does exist, it’s questionable as to whether it is irrevocable. If it isn’t irrevocable, then there is no income splitting advantage (all income and capital gains will be taxed in the parents/grandparents hands). To achieve any kind of income splitting, the transfer of assets into the account must be irrevocable. So, when setting up an in trust account: You must ensure it’s an irrevocable gift - otherwise, you will be taxed on all investment income (interest, dividends and capital gains). As an irrevocable gift, you lose control and the child, upon reaching the age of majority, now has full access to the money to use as they see fit (which unfortunately may mean a trip to Australia instead of university). These are very niche options and if this is something that you think is applicable to your situation I encourage you to meet with me and discuss a plan. Note to Consultant: For more information see the Tax & Estate Library.
  • You do need to be at least 18 to make a TFSA contribution, so parents cannot establish TFSAs as minor accounts. If parents wish to save money in TFSAs to use for financing a child’s future education, the parents must use their own TFSA contribution room. TFSA holders may contribute up to $5,000/year (indexed) to a TFSA. The contribution is not tax-deductible, but you pay no tax on the assets within the TFSA, and you pay no tax on withdrawals from TFSAs. Withdrawals can be used for any purpose, and the amount you withdraw in a given year will be added back to your TFSA contribution room for the following year. Note to Consultant: For more information, see the Tax & Estate Library.
  • Most people think of insurance as basic financial protection for loved ones, but insurance can offer the ability to provide for the risk of illness or death while also providing some values that can accumulate over time. While we don’t like to think that a child will become critically ill or die, the children’s hospitals across Canada can attest to the fact that it happens. Insurance products are available to help ease the financial burdens of these events, at a cost that is minimal. And these types of insurance also provide some degree of cash availability in the future, dependent on the type of insurance. For example, a permanent life insurance policy can provide immediate death benefit for a child, at a very low cost that is locked in for life! In addition, you can add on a rider that will allow that child to purpose additional insurance when he or she is an adult with no requirement to prove their insurability, no medicals, no concern regarding their health. A permanent life insurance policy will also have a savings element, where there is a Guaranteed Cash Value that is specified right in the policy contract, and Dividends, in the case of a Participating Life plan, which can augment the policy values over time and provide additional cash, or paid up insurance. Dividends, however are based on current scales and are not guaranteed, although with most insurance companies, such as Canada Life, the record dates back to the late 1800’s with dividends being declared every year. Universal Life insurance also provides a death benefit but the values in the plan are dependent on investment options that are chosen which can vary from a G.I.C. equivalent to more robust funds such as equity and bond funds that participate in the markets. Therefore, the fund values, may be more or less than a permanent insurance plan, as they are subject to the changes in the marketplace. To address the unspeakable event of a child suffering a critical illness, a policy can be purchased for a low premium that will cover stated conditions until their Age 25, at which time a refund of premiums will be paid out as a lump sum, which can be used for any purpose, education, financing a new business, a down payment on a home, et cetera. The funds do not have to be used for educational purposes.
  • A Registered Education Savings Plan or RESP is a trust governed by the Income Tax Act (Canada) that allows subscribers (usually parents or grandparents) to make contributions on behalf of a beneficiary (usually a child) to save for post-secondary education. The advantages are that it’s easy to set up, there are no legal or accounting expenses, and the subscriber retains complete control of the funds. The taxation of all income (interest, dividends and capital gains) is deferred while the underlying assets are held by the RESP. Once the child attends post-secondary education, the income from the RESP is taxed in the child’s hands when it’s paid out (possibly at a lower tax rate or no tax at all). The RESP growth will be used to pay for a post-secondary education, although the parent/grandparent has control over the contributions. In certain situations, the RESP may receive the Canada Education Savings Grant and/or other government funds, such as the Canada Learning Bond (CLB), the Alberta Centennial Education Savings grant (ACES) and the Qu é bec Education Savings Incentive (QESI). But, you can only access these grants if you open an RESP! Disadvantages include restrictions on how much may be contributed to the RESP (cumulatively) and restrictions on the use of the RESP’s income should the beneficiary not attend post-secondary school (I’ll address this later in the presentation). Note to Consultant: For more information, see the Tax & Estate Library.
  • Let’s take a closer look at some of the top benefits of the RESP are: Government grants - Human Resources and Skills Development Canada provides a government grant based on contributions made to an RESP (more information on how the grant works will be provided later in the presentation ). They may also provide a Canada Learning Bond, with no requirement to make matching contributions. The CLB is income tested and only available for children receiving the National Child Supplement or NCB which is part of the CCTB and awarded to “lower income” families. The income threshold for NCB eligibility varies depending on family size, but generally speaking, if family income exceeds $38,000 the family will probably not qualify for NCB. The maximum payout is also $2,000. Tax deferral - every cent in the RESP can grow on a tax deferred basis until it is withdrawn; Ability to income split - when your child starts school and receives an Educational Assistance Payment (EAP) from the RESP, your child - not you - pays the tax on the withdrawn amount. More than likely, very little tax will be paid on this amount because as a student, your child will likely have very little income and lots of tuition and education credits.
  • A lifetime maximum contribution limit of $50,000 is based per beneficiary - not per plan. Therefore, if you are not the parent of the child beneficiary, it makes sense to discuss your intentions to establish an RESP with the parents of the child to ensure that not more than $50,000 is being contributed for each child by all contributors. Because of the way the CES Grant program works, many subscribers choose to limit annual contributions to $2,500 per year to ensure access to the maximum CES Grant ( or $5,000 per year for children with Basic CES Grant carry forward room ). The contribution and termination time limits provide ample opportunity for the funds to be used for education purposes – even when the plan is established immediately following the birth of a child.
  • As mentioned previously, the Basic CES Grant program started in 1998. From 1998-2006, $400 of annual grant room has been available to each Canadian resident child and $500 per year from 2007 onward. CES Grant is a matching program – you must contribute funds to an RESP to be eligible to receive it. How much money you get in terms of Basic CES Grant depends on how much you contribute to the RESP, and when. The amount of Basic CES Grant that you will get in a year will be the lesser of: 20% of annual contributions, The child’s CES Grant room, or $1,000 So if a child who has no room carried forward from a prior year, and thus only has $500 of Basic CES Grant room, then you only need to contribute $2,500 to receive the full $500 of Basic CES Grant – i.e. 20% of $2,500 = $500. But if the child has room carried forward from another year, then you can potentially receive CES Grant on up to the first $5,000 of contributions – i.e. 20% of $5,000 = $1,000, which is the maximum annual Basic CES Grant. You can never exceed $1000 of Basic CES Grant in a year.
  • Take the audience through the example on the slide.
  • Unlike the Basic CES Grant, the Additional CES Grant does not carry forward. If you do not make an eligible contribution in the year you’re eligible, you will not be able to catch up later. Additional CES Grant is awarded to families whose income is below the prescribed annual thresholds. The 2010 thresholds are $39,065 and $78,130. For income below the first threshold, the first $500 of contributions gets an additional match rate of 20%. For income between the first and second thresholds, the additional match rate is 10%. The maximum Additional CES Grant in a year is thus $100 or $50 (or $0), depending on income level.
  • It may seem like just a little while ago that you brought your new baby home or met your grandchild for the first time. Now, a few years have passed and the nagging feeling that you should be saving for their education is growing. If this sounds like you, take heart. Every bit you save starting now will make a difference. Take the audience through the example on the slide.
  • Note to Consultant: use this slide only if presenting to Alberta residents.
  • Note to Consultant: Use this slide only if presenting to Québec residents.
  • Though contributions to an RESP are made with after-tax dollars, you do not pay tax on growth in an RESP until money is withdrawn. If the growth is paid to your child while he or she is attending an eligible post-secondary education program, then you won’t pay taxes on the growth – your child will, and he or she will likely be in a lower tax bracket. Contributions can be withdrawn from the plan tax free. It is not recommended that a parent withdraw contributions from the plan prior to the child attending post-secondary school - as a withdrawal of capital will result in the repayment of grant to HRSDC. Note to Consultant: This is usually not an issue if capital is withdrawn after the child starts post secondary school.
  • Let’s take a look at what the value of an RESP could be to you. Take the audience through the example on the slide – highlighting the low monthly payment required to maximize the grant and the bars for the government contribution and growth.
  • Choosing which investments to hold inside your RESP depends on a number of factors including: Your overall financial goals, Your time horizon, and Your tolerance for risk. Opting to include a mutual fund investment in your RESP can deliver both flexibility and growth potential. To ensure your RESP investments are able to deliver the kind of returns you need without exposing you to more risk than you’re prepared to accept, it’s a good idea to diversify the investments help within your RESP. An Investors Group RESP offer you the flexibility of choosing from more than 130 mutual funds and from a variety of fund families. We’ll also review your goals and risk tolerance over time to help you choose the RESP solution that is most appropriate for you throughout your child’s pre-school, elementary school and secondary school years.
  • Your child may decide to travel for a year or two before beginning higher education, and that’s okay - as mentioned earlier, the money in an RESP can be retained until the end of the 35 th year following establishment (40 in some cases where the child is disabled). If your child decides to not pursue post-secondary education all together you may: Change the beneficiary in most RESPs. Transfer the RESP assets to the RESP of another child in your family. In both of these instances, there are certain restrictions that I can explain fully for you at a later time. 3. You can also take the RESP income. You (as the contributor/subscriber) can either take up to $50,000 of the plan’s income and add it to your personal RRSP or your spouse’s spousal RRSP, provided you have sufficient RRSP contribution room available. Or, you may take the income from the plan in cash – but, it is subject to a 20% penalty tax in the year of withdrawal. That’s in addition to regular taxes at your marginal tax rate. In these instances, the accumulated CES Grants must be returned to HRSDC. In order to roll the RESP’s income into an RRSP or take as cash: the RESP has to have been in existence for at least 10 years, You must be a resident of Canada, and Your child is 21 years of age or older and is not pursuing post-secondary education.
  • Here’s an example of the power of tax deferral and the grant that an RESP provides over another form of investing (such as a TFSA, a minor account or irrevocable trust, and a non-registered account or revocable trust). Nathan’s parents have $2,500/year to invest for his education. Nathan is eligible for the Basic CES Grant, his parents have TFSA contribution room, but they could also invest in a minor account (irrevocable trust), or a non-registered portfolio. Which one should they choose? We will assume that during the time that they are accumulating funds, their marginal tax rate is 40%, and Nathan’s is 0%. At the end of the 18-year accumulation period, they intend to distribute the funds by fully depleting the account, and indexing the payouts at 5% to account for tuition inflation. With respect to the RESP, each payment will consist of a combination of a tax-free withdrawal of contributions and a taxable Educational Assistance Payment. The portion that is a tax-free withdrawal of contributions will also be indexed to 5%.
  • In all cases, the rate of return is 6.5%, but within the RESP, there is no tax payable while the funds are accumulating in the RESP. Also, the RESP is receiving $500/year in Basic CES Grant until Nathan reaches the $7,200 lifetime limit part-way through year 15. on the TFSA, there is no tax payable while the funds are accumulating in the TFSA, or when they come out. On the non-registered account, we’re assuming that there is some deferred growth, but otherwise some tax is being paid each year by the parents.
  • By the end of the accumulation period, the same annual contribution of $2,500 grows to: $101,461 in the RESP $86,292 in the TFSA $80,177 in the minor account, and $78,531 in the parent’s non-registered account So it looks like the RESP is well ahead of all the options – until we consider that within the RESP, only some of the funds (the $45,000 in contributions) can come out tax-free. The plan income and CES Grant will be taxable when it is paid out to Nathan, albeit at a low rate of 15%. The parent’s non-registered account look roughly similar, however there is a substantial amount of accrued capital gains on the non-registered investment.
  • Now that Nathan’s parents have accumulated all this cash within these different investment vehicles, they want to withdraw it. Let’s assume that they will completely deplete the account value at the end of 4 years, but that they will withdraw slightly more in year 4 than year 3, slightly more in year 3 than 2, and slightly more in year 2 than 1 – i.e. we’re assuming an indexation of about 5.5%, so that we can accommodate inflation with respect to education costs. We’ll also assume, with the RESP, that the $45,000 in contributions are also paid out in that indexed fashion. After all taxes are taken into account, the RESP will pay a net amount of $23,587 in year 1, compared to $22,034 on the TFSA, $20,315 on the minor account, and $18,633 on the non-registered account. Each year, the RESP pays out slightly more than each of the other options. If the RESP had not received any Basic CES Grant, then the TFSA would have been ahead.
  • My basic recommendation is that everyone should consider an RESP if saving for a child’s education. This is to take advantage of the CES Grant and the tax deferral. However, if you intend to save more than $2,500 per year, which is the amount needed to maximize the annual $500 CES Grant - there may be other suitable education savings options to combine with the RESP to maximize your savings. A higher level of savings may be required if you’re looking to cover more of the additional educational expenses beyond tuition – like books and supplies, if your child is planning to go to school away from home, or if they are planning on graduate school. I’ve mentioned the various options during our session here today and now, rather than comparing them all, let’s take a look at this example on the slide that shows a combination strategy of RESPs and TFSAs. Let’s assume that you have $5,000 a year to invest for your child’s education and you have room in your TFSA to decide between an RESP and a TFSA as a savings vehicle, which one will you choose? Note to Consultant: These amounts do not include the Alberta: ACES grant or the Quebec: QESI grant. Strategy #1: TFSA only If you contribute $5,000 to a TFSA annually for 18 years – the ending value is $172,584 – In this scenario, no Canada Education Savings Grant (CES Grant) is obtained. However, if your child chooses not to go into post secondary education there would be no penalty on the monies withdrawn –the owner of the TFSA would receive the full amount tax-free from the TFSA. Strategy #2: TFSA first, RESP second (you still maximize the CES Grant) The next bar shows us if you contribute $5,000 to a TFSA for 10 years followed by $5,000 to an RESP for 8 years – the ending value is $181,434. In this scenario, you have decided to delay the decision to utilise an RESP until you had a better idea as to whether your child will enter post secondary education – in this case, when the child reaches age 10. In this scenario the maximum $7,200 CESG is still obtained – due to the ‘catch up’ feature the CESG offers. Strategy #3: RESP first (hit lifetime maximum of $50,000), TFSA second The next bar shows a slightly different strategy. If you contribute $5,000 to your RESP for 10 years and then contribute $5,000 to a TFSA for 8 years – the ending value goes up a bit more to $184,476. Now in this strategy, the decision to save for your child's education is made earlier – at birth. Payments to the RESP stop at age 10 because that is the point where you reach the RESP maximum lifetime amount of $50,000. The main difference here is that the full CES Grant is not obtained (as you would only qualify for $5000 of the maximum potential of $7,200 grant) but the additional compounding from receiving the grant earlier results in a higher ending value. Strategy #4: Contribute to both an RESP and TFSA at the same time One more situation to consider, if you contribute $2,500 to each of a TFSA and an RESP for 18 years – the ending value is highest at $187,753. This scenario results in the full $7,200 grant being obtained and also full compounding on the grant money. However, you’ve locked more money into the RESP than is needed to obtain the full CES Grant. So, I used these amounts to easily show you the result. But, know that we have flexibility in the amounts contributed in this strategy to ensure we’re maximizing the CES Grant, not locking more money into the registered plan than you need to and still ending up with the highest final value. There are certainly a lot of choices. And, this is why it’s best to review your personal situation and determine the strategy that works best for you. Note to Consultant : Here’s the more flexible solution to Strategy #4 Contribute $2500 per year to the RESP and TFSA for the first 14 years, in year 15 contribute $1000 to the RESP to obtain the final $200 of grant and $4000 into a TFSA with the final 3 years going into a TFSA. This results in the same dollar value as strategy #4, however, it offers more flexibility on a greater portion of the money.
  • Sooner is always better to get started on an education savings plan. But, with all the options available to you, know that if you haven’t started yet, it’s not too late. Together, we can review your situation and put a plan in place today to provide your children (and grandchildren) with opportunities to succeed: to afford the college or university of their choice, to follow the career they dream about, and to attain maximum earning power. Are there any questions? I’ve hoped you’ve enjoyed this presentation and thank you for attending. Note to Consultant: Ensure you have everyone fill out the Questionnaire and let them know that you will be contacting them later in the week to set a time to meet in person and discuss their personal situation and how an RESP and potentially other smart education savings options can fit into their plan.

Transcript

  • 1. Pieter J. Demeester Provide the key to a firstWealth and Risk ManagementConsultant class educationInvestors Group Financial Services, Inc .  A+ solutions to fund your child’s post-secondary education
  • 2. This Presentation  Is provided by Investors Group Financial Services Inc. (in Québec, a financial services firm).  Is provided by Investors Group Securities Inc. (in Québec, firm in financial planning).  Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances from an Investors Group Consultant.  The Canada Education Savings Grant and Canada Learning Bond are provided by the Government of Canada. CLB eligibility depends on family income levels. The Alberta Centennial Education Savings grant is provided by the Government of Alberta. The Quebec Education Savings Incentive is provided by the Government of Quebec.  Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated.  Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Great- West Life Assurance Company (outside of Québec).  ™Trademarks) owned by IGM Financial Inc. and licensed to its subsidiary corporations.2
  • 3. Introduction  Today’s Objective:  To discuss the importance of planning for a child’s education and the methods in which you can save.  Particular attention is paid to Registered Education Savings Plans (RESPs).  Today’s Agenda:  Impact of education  Cost of education  Options to save for a post-secondary education  Features and benefits of RESPs  Beyond RESPs: Maximize your savings3
  • 4. Why save?  Opportunities for better employment usually increase with higher education.  The cost of post secondary education is skyrocketing.  Long-term planning can overcome the financial burdens of higher education.4
  • 5. Impact of Post-Secondary Education Average earnings based on highest level of schooling: Less than high school $32,029 High school $37,403 Trade certificate/diploma $39,996 College certificate/diploma $42,937 University – Bachelor level $56,048 University – Post-bachelor level $66,535 Source: 2006 Census – Statistics Canada. Last modified 04/01/2010.5
  • 6. Costs do go up over time What could your child’s annual tuition be in 10, 15 and 20 years? Estimated costs: Today 10 years 15 years 20 years College program $1,900 $3,095 $3,950 $5,041 University program $4,917 $8,009 $10,222 $13,046 $200- $326- $416- $531- Apprenticeship program $800 $1,303 $1,663 $2,123 Assuming a 5% per year increase. Source: Building futures planning guide, CFEE.6
  • 7. The Khans’ story  The Khans’ 18 year old son, Jamaal, plans to attend university next year. He will live on campus for the entire four year degree program. What will it cost? Education costs for four years $4,917 a year x 4 years = $19,668 Living costs (rent, food, internet, and so on) $11,000 a year x 4 years = $44,000 Other costs (books, student fees, and so on) $3,000 a year x 4 years = $12,000 Total costs for Jamaal’s four year university degree $75,668 Note: These numbers are estimates only. Your child’s costs could be higher or lower. Source: Building futures planning guide, CFEE.7
  • 8. How can you save?  You can pay for a post-secondary education from the following sources:  Your current income at the time your child is in school,  Your child may work,  Awards, scholarships and grants,  Student loans,  Borrowed funds (from family and friends), and/or  Your personal savings.8
  • 9. Education Saving Options  Non-registered investments  Minor accounts (investment in the name of the minor)  Trusts:  Formal trusts  Informal trusts  Tax-Free Savings Accounts (TFSAs)  Insurance:  Critical illness insurance on the life of child with return of premium rider  Permanent life insurance on the life of child  Universal life insurance on the life of child  Registered Education Savings Plans (RESPs)9
  • 10. Non-registered investments Advantages Disadvantages  Owner retains full control  Owner pays tax on income and capital gains  Can use proceeds for any purpose at any time10
  • 11. Education Savings Options Option Advantages Disadvantages  Child pays tax on all capital  Loss of control gains and income earned after  Parent/Grandparent pays tax on income until Minor age 18 child is 18 Accounts  Can use proceeds for any  Access to accounts may be restricted while purpose child is a minor  Trustee has full control (subject  Expense set-up (legal & accounting fees) to trust document) Formal  Parent/Grandparent pays tax on income until  Child pays tax on capital gains child is 18 (unless it’s the child’s money) Trusts and compound interest (if irrevocable)  Can use funds for any purpose  Lack of clarity – do you even have a trust (not necessarily education)  May lose control at age 18/19 (is it an Informal irrevocable gift?) Trusts  Lack of certainty on who pays the tax (is it an irrevocable gift?)  Parents may not approve of use of proceeds11
  • 12. Tax-Free Savings Accounts (TFSA) Advantages: Disadvantages:  Control retained by  TFSA holder must be 18+: parent/grandparent uses the parent’s TFSA contribution room  No tax payable on investment or withdrawals  Contribution limits ($5,000 per year, indexed)  Can use funds for any purpose (not necessarily education)  Withdrawals increase TFSA contribution limit for the following year12
  • 13. Insurance Options Type of Advantages Disadvantages Coverage Life insurance on child exists from day one Amount you invest is subject to financial and medical underwriting Low guaranteed premiums locked in for life Potential income tax consequences regarding Permanent Guaranteed Cash Values withdrawals. If withdrawals occur after Life Tax: cash and fund values grow tax sheltered within ownership, then taxable to the child the policy until withdrawn If Participating, dividend values may be Funds withdrawn can be used for any purpose subject to fluctuation and are not guaranteed Life insurance on child exists from day one Amount you invest is subject to financial and medical underwriting Low premium locked in for life  Potential income tax consequences regarding Choice of investment options for accumulation Universal within the policy withdrawals. If withdrawals occur after ownership, then taxable to the child life Funds withdrawn can be used for any purpose Fund value is not guaranteed and is Tax: No tax on investment until withdrawn and dependent on investment options selected death benefit proceeds are tax free Provides critical illness insurance Amount you invest is subject to financial and medical underwriting Low guaranteed premiums locked in at young age Critical No values available for withdrawal until age Refund of premium at age 25 not taxable, and can Illness be used for any purpose 25 Can continue coverage after Age 2513
  • 14. Registered Education Savings Plan (RESP) Advantages Disadvantages  Control  Use of growth, grants restricted  Tax  No tax until withdrawals begin  Contribution limits  Child pays tax on growth, grants  Contributions come out tax free  Can use contributions for any purpose  Potential for free money (government grants)  Options available if the child does not go on to school14
  • 15. RESPs - The Main Benefits  Free money available from government grants,  Canada Education Savings Grant (CES Grant)* 1. Basic 2. Additional  Canada Learning Bond (CLB)* - Paid where a child is born in 2004 or later and child’s family is receiving the National Child Benefit supplement - Amount is $500 in the first year a child qualifies and $100 per year for remaining eligible years up to age 15 - Not a matching program; no contributions required  Tax deferred accumulation of earnings, and  Ability to split income with the beneficiary. *CES/CLB provided by Government of Canada15
  • 16. RESPs - How much can be contributed?  Contributions of up to $50,000 are allowed for each child over their lifetime.  No contributions are permitted after the 31st year following the year of the plan’s establishment.*  Plan must be terminated after the 35th year following the year of the plan’s establishment.* *These time limits can be extended by an additional 4 years (contributions) or 5 years (plan termination) in certain cases where the beneficiary is disabled.16
  • 17. Basic CES Grant  Basic CES Grant room accumulates & carries forward  $400/year from earlier of year of birth or 1998, through 2006  $500/year from earlier of year of birth or 2007, onwards  Amount of Basic CES Grant payable = the lesser of:  20% of annual contributions,  The child’s CES Grant room, or  $1,000  Only the first $5,000 of annual contributions have the potential to receive Basic CES Grant If your child is a little older, it’s not too late to take advantage of the free money!17
  • 18. Example of Basic CES Grant carry forward  Ginette was born in 2005, but had no RESP until 2010.  Room accumulated to end of 2009 = ($400 * 2) + ($500 * 3) = $2,300  Ginette’s parents can “catch up” by contributing $5,000/year from 2010-2013, then $800 in 2014, and then $2,500/year until Ginette’s $7,200 lifetime limit is reached. Year Basic CES Basic CES Contribution Basic CES Basic CES Grant Grant Grant Grant room room received room to generated available carry forward 2005-2009 2,300 2010 500 2,800 5,000 1,000 1,800 2011 500 2,300 5,000 1,000 1,300 2012 500 1,800 5,000 1,000 800 2013 500 1,300 5,000 1,000 300 2014 500 800 4,000 800 0 2015 500 500 2,500 500 018
  • 19. Additional CES Grant  Additional CES Grant room does not accumulate – if not used in the year, it will not carry forward  Income-tested: only families in “low” and “middle” income brackets are eligible  Only available on the first $500 of contributions  Additional 20% (max $100) if in “low” income, i.e. < $40,970*  Additional 10% (max $50) if in “middle” income, i.e. between $40,970 and $81,941*  Lifetime total CES Grant (Basic & Additional) = $7,200/child; receiving Additional CES Grant allows you to reach that limit sooner *Income amounts shown are for 2010. The family net income amounts are updated each year. Source: Building futures planning guide. CFEE, 2008.19
  • 20. Is it too late to start saving?  Julie is 8 years old.  Her parents put away $200 a month toward an RESP.  The contribution is topped up by $40 each month through the CES Grant.  In ten years, her parent’s will have accumulated $39,172 based on an annual average return of 6%.  The contributions ($24,000) can be withdrawn tax free.  The CES Grant ($4,800) and the accumulated growth ($10,372) are paid to Julie and taxed at her rate. Every bit you save and the grant you receive starting now will make a difference. The rate of return shown is used only to illustrate the effects of the compound growth rate20 and is not intended to reflect future values of the RESP or returns on investment in the RESP.
  • 21. Alberta Centennial Education Savings Grant (ACES)*  Child’s parents must be resident in Alberta.  Child must have been born in 2005 or later.  No matching requirements.  One-time ACES grant of $500 payable into an RESP.  Additional ACES grant of $100 when child turns 8, 11, or 14 if:  the child is enrolled in school in Alberta, and  $100 of contributions has been invested in an RESP within one year of the application.21 *ACES is provided by the Government of Alberta.
  • 22. Québec Education Savings Incentive (QESI)*  Child must be a Québec resident at the end of the year in which the contribution is made.  Contributions made after February 21, 2007 will be eligible to the QESI.  The QESI can reach a cumulative lifetime maximum of $3,600 per child.22 QESI is provided by the Government of Québec.
  • 23. RESP Taxation  Contributions are not tax-deductible.  Contributions are not taxable when withdrawn.  Investment income (interest, dividends and capital gains) is tax deferred while in the plan.  Growth and government grant money are fully taxable once withdrawn.  Growth and government grant money paid to the beneficiary as an educational assistance payment (EAP) is taxed in his/her hands (likely a lower tax rate), resulting in income splitting with the subscriber.23
  • 24. Value of an RESP A $208.33 monthly contribution to an RESP for 18 years combined with a $500 annual government grant for 14.4 years compounded at 6.5% over 18 years can provide you with a pre-tax market value of $99,018 to finance a post secondary education.* *Assuming a $208.33 lump sum contribution on the first of each month, a $500 annual government grant for 14 years and a $200 government grant in year 15 providing a maximum24 $7200 lifetime grant. Rate of return is for illustrative purposes only.
  • 25. What type of investment is right for your RESP?  Choosing which investments to hold inside your RESP depends on:  Your overall financial goals,  Your time horizon, and  Your tolerance for risk.  An Investors Group RESP can deliver:  Flexibility,  Growth potential, and  The opportunity to diversify your investments.25
  • 26. Not pursuing post-secondary education?  A parent/grandparent that makes contributions may:  Change the beneficiary of the RESP*,  Transfer the RESP assets to the RESP of another beneficiary*, or  Withdraw the contributions tax free and pay the RESP income to himself/herself, either: - in cash, subject to taxation plus a special penalty tax in the year of withdrawal, or - directly to an RRSP, subject to a maximum of $50,000 and having available RRSP contribution room.26 * Certain conditions will apply.
  • 27. Comparing Savings Options  Nathan was born in 2008.  Parents marginal tax rate (MTR) during  His parents have $2,500 a year to distribution is 40%. invest for 18 years.  Nathan’s MTR during distribution is  Nathan is eligible for Basic CES 15%. Grant only.  The RESP is depleted over a 4-year  Parents marginal tax rate (MTR) during accumulation is 40%. period (same rates of return, indexed at 5%.  Nathan’s MTR during accumulation is 0%.  Each payment consists of a tax free withdrawal of contributions and a taxable EAP.27
  • 28. RESP, TFSA & Non-registered Options RESP  No tax during accumulation.  Collect CES Grant.  Withdrawals taxed at Nathan’s rate of 15%. Non-registered Account TFSA  All taxable to parents at 40%.  No tax during accumulation.  No tax during distribution. Rate of return = 6.5% (1.5% interest, 0.5% dividends, 1.0% capital gains, 3.5% deferred growth) The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the investment or returns on investment.28
  • 29. End of accumulation period (Year 18) Accumulation: $2,500/year for 18 years $120,000 $101,461 $100,000 $86,292 $78,531 $80,000 $4 9 ,2 6 1 Income $4 1, 2 9 2 $3 3 ,53 1 Basic CES Grant $60,000 $7,2 0 0 $0 $0 Contributions $40,000 $20,000 $4 5, 0 0 0 $4 5, 0 0 0 $4 5,0 0 0 $0 RESP TFSA Non-registeredRate of return = 6.5% (1.5% interest, 0.5% dividends, 1.0% capital gains, 3.5% deferred growth)The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect futurevalues of the investment or returns on investment.29
  • 30. Distribution period (Years 19-22) Net annual distributions, indexed at 5% over 4 years $120,000 $101,664 $100,000 $94,970 Year 4 $ 2 7 ,3 0 5 $80,311 $80,000 $ 2 5 ,5 0 7 Year 3 $ 2 1,5 70 Year 2 $60,000 $ 2 6 ,0 0 5 Year 1 $ 2 4 ,2 9 3 $ 2 0 ,5 4 3 $40,000 $ 2 4 ,7 6 7 $ 23 ,13 6 $ 19 ,5 65 $20,000 $ 2 3 ,5 8 7 $ 2 2 ,0 3 4 $ 18 ,6 33 $0 R ES P TFSA N o n- re g is te re d Rate of return = 6.5% (1.5% interest, 0.5% dividends, 1.0% capital gains, 3.5% deferred growth) The rate of return is used only to illustrate the effects of the compound growth rate and is not30 intended to reflect future values of the investment or returns on investment.
  • 31. Beyond RESPs - $5,000/year to invest  Combine strategies to maximize your savings. Maximum final value with flexibility. Assumptions: Investment Return within the RESP and TFSA are both 6.5%.31 Lump sum annual contributions on January 1 of each year.
  • 32. Invest in their future and expand education opportunities. I can help: See me about setting up an appointment to learn how The Plan by Investors Group™ can help provide the key to a first class education. Questions? Email me at pieter.demeester@investorsgorup.com32 “Provide the key to a first class education” © Investors Group Inc. 2010 (08/2010) C3147