Tag Archives: tuition

My Child Is Now 15 (Or 16) What Should I Do with My Self-Directed Brokerage RESP?

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Managing an RESP is easy for the first dozen years. You have to make some decisions at the beginning. (Family plan? Individual plan? Bank? Brokerage? 100% safe savings accounts and GICs only? Some risk with equity investing in stocks through ETFs or mutual funds or individual blue chip investments?) After a while, though, you fall into an investment pattern and just stick with it. But as your child (or eldest child) nears the age of starting post-secondary school education, you need to make some decisions again.

First: Move the Money for First Year Into Risk-Free Investments

If your child is going to attend a university and live in residence for their first year after high school, you can estimate that they will need at least $20 000. Programs like Engineering will cost more. Living at home might cost less. But $20 000 is a good starting estimate and it’s likely they will actually need more than that for a university program, unless you live in and they want to attend university in Quebec.

You may have that $20 000 invested in equities. It may be in a mirror-the-stock-market ETF, a mutual fund, or shares in specific companies. If, the week before you need to take it out in cash to pay for residence or fees, the stock market has a sharp pull-back you could be in trouble. A 10% drop in the equity market might drop your $20 000 to $18 000.

Many people who have RESPs with over $20 000 in them could probably delay liquidating the equities in the RESP for a while. They could find the money to pay for residence and tuition in other places, like their emergency fund. But that might not be a great idea: it can take a year or more for the market to rebound. And, of course, there is no “stop limit” that guarantees it will only decline 10%. It could crash like it did in 2008-2009 and take years to claw its way back up.

So if you’re risk averse like I am, you will probably want to get that $20 000 for first year into something risk free before it’s needed. When your child reaches the age of 15 or 16, you may want to put that $20 000 into a cash account or a GIC or term deposit of some kind. I’ll be checking the rates offered by various investments at BMO InvestorLine soon.

Next: Consider WHERE You Want to House Your RESP While Your Child Is Making Withdrawals

According to the CRA information for RESP providers (like banks and brokerages) once your child starts making withdrawals from the RESP, you cannot move the RESP to another institution!

So in the year or so before your child graduates from high school, you should evaluate your RESP provider. Are there fees to make withdrawals from the RESP? What type of paperwork will the provider require to make the withdrawals? Would it be easier to move the entire RESP to another provider with lower fees or less paperwork?

Reading about some of the strange requirements for RESP withdrawals that others have experienced in the past makes me nervous. Soon, I will start looking at the rules at BMO InvestorLine and deciding if they are acceptable. If not, I will need a few months to get the investments transferred elsewhere. So I’ll want to make the decision long before my child is in final year at high school.

Finally: Develop a Strategy for the Next Few Years for the RESP

If you have more than one child, you also may need to plan a strategy for the RESP. When will you liquidate any equity holdings? Will you sell them when a certain profit is achieved? Or will you sell them based purely on the time at which the money may be needed? Will you buy a series of GICs with 5, 4 and 3 year terms, or only use 1-year terms?

How will you make the division of the loot equitable? What if you liquidate the equities for your eldest child when the market is high but when you go to do the same for your youngest child the market has been down for years? Do you “owe” each child the same number of dollars for their education? Will you “hold back” some of the money from the eldest child in case you need it to keep things even for the youngest of several children?

It’s better to develop a strategy before the first child starts using the money. Which means my husband and I have some thinking to do!

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How much money do you expect your child to need for their first year of post-secondary school education? Will you try to set that amount aside in cash or fixed income investments a year or two before they finish high school? Please share your views with a comment.

How Did My Income Tax Program Use Up All of My Tuition and Education Amounts So Quickly?

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When you’re still attending college or university and not make much money it’s common to end up carrying forward large amounts of tuition and education amounts. It can look like you have tens of thousands of dollars to use to reduce your income tax payable. Yet when you start working full-time you may find the tuition and education amounts get used up way more quickly than you expect: here’s why.

A Common Mistake: Thinking Education and Tuition Amounts Reduce Your Taxes Dollar for Dollar

When you see big $$$ values in your carry forward tuition and or education amounts, you may start thinking it will be years before you have to pay any income taxes. After all, if you have $40 000 in carry forwards, and you’re only making $35 000 a year, they should last a long time, right?

Unfortunately, no.

The government loves making it SOUND like you are getting a big deduction.

So they say things like “You can write off $500 of your child’s fitness expenses!” They don’t say “And it will get you a whopping $75 off your taxes payable!” But that’s all the $500 saves you: $75 in federal tax payable.

Your Education and Tuition amounts do no reduce your taxes payable dollar for dollar.

How Does the Income Tax Math Work for the Education and Tuition Amounts?

Let’s look at an example.

Say you earned $35 000 in 2015.

According to the 2015 Ernst and Young personal tax calculator, in Ontario, with no extra deductions, that would mean you would owe about $4 820 in tax, most of which should have been deducted by your employer.

You don’t use up $4 820 of your education amounts though to reduce this tax payable to 0.

The education/tuition amounts are converted into credits at a really low percentage.

Line 23 (also called 323) on your Federal Schedule 1 is the amount of the education/tuition claim you are using up.

As you can see further down on Line 32 you apply a rate of 15% to that amount.

So to negate $1000 of tax owing, you have to use up $6 667 of your education/tuition amount.

To reduce your $4820 of tax owing to 0, it will use up $32 133 of your carried forward education and tuition amounts.

You would then get a tax refund of up to $4820 depending on the amount of tax that was with-held from your pay cheques and your other deductions and credits.

Don’t You Wish the Education and Tuition Amount WAS Applied $ for $ Against Your Taxes Owing?

If the education and tuition amounts were applied $ for $ against your taxes owing, it would be great, because it would mean the government was paying for your schooling.

Unfortunately, they are only willing to pay for 15% of your schooling. (Plus a bit more if your province gives you a tax break on your provincial taxes.)

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Did you get a great tax refund the first year you worked after finishing college or university? Don’t you wish you could get a refund like that again? Please share your views with a comment.