a. Funding children’s tuition with RRSPs should be done only as a last resort in my opinion. I’d do it out of necessity, not as a result of long-term planning. Funding one’s own studies with the lifelong learning plan (LLP) is a better idea, but it’s not available for someone’s children.
b. (In regards to RESPs) Good idea, good plan. I would however postpone RESPs contributions until your kids reach age 8, which would give you a chance to pay-off your mortgage and further eliminate your contribution room beforehand. The CESG (20% grant) can be doubled-up if you skipped years of contribution (The 8 (actually should be 9 now 10 I think, CESGlife=$7200 till age17, NormalYear=$500, doubleUp=$1000) year-old mark is your last year to be able to double-up all missed years).
Waiting until later years to contribute also gives you a chance to assess your child’s academic ability and/or to reassess your abilities to finance its education.
c. (in regards to taxable investments) It’s a good way to supplement RESPs. Unless you believe there is a high-probability that your children will not want or not be able to attend university (or other qualifying programs), I would prefer RESPs over non-registered investments. You should understand however that RESPs cannot be enough to cover a typical 4-year degree and its related expenses, so they’ll need to be supplemented by (c) or other means.
d. Cash from parents’ earnings (the original poster had mentionned a family income of $155K). Here is the kicker: let’s assume that your house is paid off, your RRSPs are maxed out and you still make the same income level. It should be possible for your couple making $155,000 per year (adjusted for inflation) to be able to redirect $20,000 to $40,000 per year to your children’s education without impacting your capability to max-out your current year’s RRSP contributions and without having to borrow. That would be what I prefer over (c) and it can potentially be a comparable benefit to (b) (RESPs). Financing with (d) means that you don’t have to change your portfolio to a more conservative position (GICs, bonds, money market funds) and accept a lower return for 3-4 years before tuition is needed or ensure that a small portfolio is sufficiently diversified to protect yourself against market fluctuations. If that is a possibility for you and your husband, you can continue to leave your RRSPs and non-registered portfolios untouched providing you with a moderate or aggressive return when your kids reach university age. The drawback: nobody ever knows what the future holds, and you may not be able to afford this.
(e). Borrow from home equity. Ok. That sounds counterproductive, but keep in mind that the average couple who prioritize RESPs over mortgage repayment is doing just that without knowing. For example, if a couple will be paying their house over 20 or 25 years (and during their children’s studies) because they prioritized RESP investments over mortgage repayment, they effectively end up carrying a mortgage because they pre-financed their children’s education. That means that accelerating mortgage payments accomplishes a similar feat as investing in your children’s education. You can still re-borrow the $$$ from an HELOC later. It makes you and your child realize that it’s not free-money. (e) should still be less attractive than (b)-(RESPs), but you also have a few years left before you start losing CESG potential.
(f). Self-financing?. Although it’s nice for mom and dad to kick a few dollars in, the child should have saved a few dollars prior to beginning university, and by working a few weekend hours and summer jobs. It makes the child understand that the money and education is not free, and saving is a good value.
(g). Student loans. Most of us took that route. It’s not possible to make it 100% financed, but a small amount of loans should be acceptable. Did you start life without student loans? Why should your kids? or why should you work through retirement (i.e. postpone retirement) so that your adult child is debt free
(h). As your husband operates a small business (and assuming he’ll continue), they could work for him (before starting university or while in school) and he could pay them for legitimate work. He’d get a 43% or 46% deduction and they would likely pay 0% (or potentially 22%) taxes. It’s hard to see that far in the future, but it’s a real possibility.
(i) Grants
Personally, I financed my education (late 80s / early 90s: 4-year degree out of town) with about 60% self-financing (savings + summer work), 20% student loans, 15% grants, 0% RESPs and 5% parent contribution (they did throw me a one-time payment when they had a one-time windfall, but overall couldn’t afford to assist me). I paid-off my student loan within 6-7 years of graduating.
Establishing RESPs is best done as part of a comprehensive financial plan which sorts out how all the pieces fit together - how is the mortgage getting retired, how is your retirement being funded, is there other debt to address, is your basic security handled (adequate life insurance, maybe disability insurance)? - then start thinking about options including RESPs for your kids.
You have to ignore the marketting and you don't need to buy into the hype that you have to end up with a monster RESP of $100K by the time your children are 18 or they won't be able to go to school...
Keep in mind that if you are doing anything to help finance your childs education and especially if you are starting from when they are born, you are ahead of the game compared to most Canadians.
Too often, young parents are blinded by doing what they think is best for their child instead of what's best for the family. I'm willing to bet that a family without financial troubles is more beneficial to a child than an RESP portfolio in 18 years.
If you have a child at 20, that child may be attending university 17-27 years before your are planning to retire... in that case, that gives you a long time to catch up on retirement planning after school is dealt with. On the other hand if you have the child when you are a little older, or are planning an earlier retirement, and the date they start school is similar to your retirement date, then retirement definatley takes more of a focal point, and the idea of using RRSP's or money that used to go towards the mortgage to fund the education is much more practical.
If you consider a couple with a $200K mortgage with a new born child, the best education planning they can do is by putting that extra $2000/yr onto their mortgage. It will cause them to pay it off in 18 years instead of 25. Then, they'll have $15,000/yr for 7 years of free cashflow to pay for their child's education. It's $60K over 4 years compared to $70-80K from an RESP yielding 6-7%, but it's a safer approach, and will yield another $45K over the 3 years after young Johny graduates. The option to reborrow against the house will always be there.
Small amounts and defined timeline often force people in more fixed income in RESP than they would normally take-on in an RRSP. As such, it's difficult to achieve rates of returns in the 7%+ range.
Advocate points for the RESP: Paying off the mortgage assumes that the amount you'd be putting into the RESP is enough to pay off the house within 18 years. That doesn't account for the fact you may not even own the house yet (or may need to upgrade at a later date) or that the amount of money you plan to put into an RESP may just not be enough. Also it could be the case where friends and family would be interested in adding money into your childs RESP, but not interested in helping you pay down your house. And if the government continues to add more benefits to having an RESP (in Alberta they give you a bonus for opening an RESP for all children born after 2005) then it could continue to be more beneficial.
The bottom line is that there are various approaches though, and financially it doesn't make a huge difference between choosing one and the other, it's mostly just a matter of what you are comfortable with.
In my (not-so-humble) opinion the best education savings plan is to have no debt when your kids are in university - the "pay as you go" option. For me and my family, that means no mortgage and personal RRSPs fully maxed at a minimum. One should pay off their mortgage and maximize RRSPs before investing in RESPs unless they have a low-income. For parents in lower income tax brackets putting money into RESPs makes more sense than for those in higher brackets. Because, for those in higher brackets, it is very hard to beat the return on RRSPs once you factor in the tax savings from your contributions for RRSP.
References
forums.canadianbusiness.com Canadian Business.com Forums Investing for RESP
www.redflagdeals.com Which RESP is best - RedFlagDeals.com Forums
TD Canada Trust - Investing - Registered Education Savings Plan with links to other sources
Canada Revenue Agency: RESP
