On the brink of a new school year, there are typically a number of expenses that families incur in addition to their recurring financial obligations. Whether it is for school supplies, extracurricular activities, or tuition fees, the household budget can shift come the fall.
Particularly, as children grow older expenses can vary, and if they earn an income some of these expenses might also be assigned to them. You probably already have a list to purchase pencil crayons and calculators, but we also want to add a few additional financial considerations to your list:
Review or build your household budget
What does your budget look like for the year? Maybe you have a little one starting their first day of kindergarten or a high school graduate heading to college. Both of these milestones have probably impacted the household budget to some extent.
When considering expenses that you may incur during the new school year take a look at your budget. Our budget worksheet can help break down your household expenses and perhaps remind you of line items you might not have considered. This is also a great activity to do with the older students in your household, maybe they are budgeting a paycheque from a summer job, or an allowance they earn helping with chores - understanding what that money contributes to gives it more meaning and can build positive budgeting habits.
Reviewing your budget is just one step in the financial management process. While you continue to build a strong foundation for achieving all of your financial goals, the ATB Wealth Financial Management Fundamentals Guide is a great reference to keep you on track.
Review education savings
Apart from expenses, many budgets for families with dependents include education savings. The most advantageous way of putting money away for post-secondary education is through a Registered Education Savings Plan (RESP). With younger kids at home, post-secondary education might not be top of mind. But, with the availability of government grants and bonds that will help your savings to grow over time, starting early is the best plan.
If your budget is currently short of the amount you’d like to save, an option could be to invest your monthly Canada Child Benefit payments for education savings.
Review education spending needs
If your child is off to post-secondary in the fall, you might be ‘turning on the tap’ of your RESP. Make sure you have what you need to make this withdrawal smoothly through your financial institution before tuition is due.
Now that you are in the withdrawal phase of your RESP life cycle, it may also be an opportune time to ensure the level of risk you are assuming within your investment account is appropriate for the remaining time horizon. The funds in your RESP have likely been saved for a significant time frame, only to be used throughout a two or four year program.
If a significant reduction in the value of your RESP would hamper your ability to cover the next tuition payment, it is important to reduce the risk you are assuming in the portfolio. This could look like holding less equities in your portfolio or simply holding upcoming tuition payments in a savings account (as opposed to invested) so they are not exposed to any market volatility.
Plan and maximize your RESP withdrawals
Once your child is enrolled at a post-secondary institution, it is important to develop a plan for the RESP withdrawals to ensure your child receives all grants, bonds and earnings while making the best use of their personal tax credits and presumably lower tax bracket. There are conditions that must be met to access the grants, bonds and earnings, so careful planning is required.
While your child is attending post-secondary, the withdrawal from an RESP is divided into two categories:
- An Educational Assistance Payment (EAP) which is taxable to the beneficiary and consists of the grants, bonds & earnings in the plan.
- A Post Secondary Withdrawal of Capital (PSE) represents a refund of your contributions and is not taxable.
If you know your child will qualify for EAPs in future years, it is generally recommended that you withdraw an amount of EAP just under the amount that will result in taxes being payable. This strategy is dependent on the amount of payment required each year and the number of years that your child’s post-secondary education is anticipated to last. If additional proceeds are required, the withdrawal can be topped up with a PSE. By spreading the EAPs over the expected length of the post-secondary program, taxable income will be kept lower, allowing assets to continue to grow on a tax-deferred basis.
To the contrary, if the post-secondary program will only last one year, or if the future of the beneficiary’s studies is uncertain, it may be prudent to receive all grants and earnings from the plan while the beneficiary still qualifies.
If maximizing the EAP withdrawal generates more income than necessary, any excess can be invested in other investment accounts for future income needs. Although taxable to your child, EAP withdrawals are sent to you, the subscriber, and you have the ability to distribute as necessary. RESP withdrawals are not just limited to tuition or education expenses and can also be used for other purposes.
Understanding how the withdrawal process works will help to ensure there are no unintended consequences when RESP withdrawals are made. The optimal EAP withdrawal for a given year will be unique to each student. If you are unsure how the student’s income level will impact their taxes, a tax advisor can help you navigate these implications on a case-by-case basis.
Another important factor in withdrawal planning is maximizing grants. In the case of a family RESP (an RESP with more than one beneficiary in the plan), the grants that were accrued by one beneficiary can be shared or withdrawn for another beneficiary of the plan. Each beneficiary, however, can only earn or access $7,200 in grants. Even with an individual RESP plan that only has one beneficiary, there is the ability to replace a beneficiary that is not attending post-secondary education with a sibling that is and transfer the grants accordingly.
Review remaining RESP balances
If you have a beneficiary listed on your RESP who has decided not to attend a qualified institution or has completed their schooling with money remaining in the RESP, there are a few options for the holder of the RESP, known as the RESP subscriber, to consider.
A subscriber can access their original contributions at any time but any remaining grants or bonds will have to be paid back to the government. This is why they’re important to maximize if you have a student heading to post-secondary. There are specific rules that govern the withdrawal of income earned.
Ideally, you will want to access all the value of the RESP while the last beneficiary of the plan still qualifies for an EAP. That way any remaining grants can be withdrawn and there is not a restriction placed on withdrawing the income/growth.
However, if that is not an option, the outstanding income can be withdrawn through what’s known as an Accumulated Income Payment (AIP). Certain conditions must be met before this type of withdrawal can be made and AIPs are fully taxable to the subscriber at their marginal tax rate. There will be an additional 20% tax applied to the AIP.
However, if the subscriber has RRSP contribution room available, they can reduce the amount of tax payable on the AIP by transferring the funds to an RRSP (subject to a lifetime maximum of $50,000). There is also an option to have the earnings in the RESP sent directly to a designated Canadian educational institution of the subscriber’s choice. In this case, the subscriber does not pay tax on the earnings or receive a donation receipt, it is essentially a forfeiture of the income.
Review other funding options
In addition to RESPs, other funding options exist to help pay for post-secondary education:
- Student loans, scholarships or grants. Student loans and assistance programs are available through the provincial or federal government and often the post-secondary institution that the child will be attending. Loans under the Canada Student Loans program are payment free until six months after the student graduates or leaves school. At tax time the student can claim a tax credit for the interest that the student or a related person paid in that tax year and any of the five preceding years. This tax credit applies only to loans granted under a government program and would not apply to any other loans utilized.
- Employer Scholarships. Many employers provide scholarships for the children of employees. The human resources department at your place of employment can confirm if this is an available option.
- Student employment. Will your child be working to assist in the payment of expenses associated with his or her education?
- Withdrawals from other investments. In addition to any income provided from RESPs, are there other investments that have been set aside or are available to fund your child’s post-secondary education?
- Borrowing from a financial institution. If there is still a shortfall for the cost of your child’s education borrowing from a financial institution or accessing a home equity line of credit is also a consideration. As mentioned, unlike the interest from a government-sponsored student loan, a tax credit would not be available for the interest paid.
This list is applicable at any time of year so whether you are building your first household budget, inspiring financial independence in your children, or enjoying a little bit more of what summer has to offer, ATB’s experts are here to help you navigate through your decision making as back to school approaches.
For more in-depth information about RESPs, check out our ATB Wealth RESP Reference Guide.
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