Saving for grandchildren? Grab the government grants

The Globe and Mail


When you’re a grandparent, it’s natural to dote on your grandkids. Little gifts here and there can show you love them.

But what about the long term?

“A lot of the time, when they have their first grandchild, they’re all excited. They buy them lots of toys and clothes and other material stuff – and a lot of the time that stuff goes in the basement, going to waste,” says Robert Armstrong, vice-president at BMO Global Asset Management.

“A grandchild always loves to get something, but what they’ll really appreciate when they head to university is some money in an RESP,” or registered education savings plan, he says.

Consider the long-ballooning price of education. The estimated cost of a four-year undergraduate degree starting in 2015 is expected to be $68,933 for students living away from home, according to Heritage Education Funds Inc., using figures from Statistics Canada and the Canadian Centre for Policy Alternatives.

If their projections hold, those costs would nearly double for students born in 2015.

Luckily, grandparents seem to be willing to help. A 2014 study by Fidelity Investments in the United States found that 53 per cent of grandparents save or plan to save for grandkids’ postsecondary costs.

But how should they save for it?

Mr. Armstrong recommends RESPs. The reason, he says, is simple: the government top-ups. “There’s money out there. Grab it, and it’s going to benefit your grandchild in the future.”

He’s referring to the Canada Education Savings Grant, which matches 20 per cent of RESP contributions for the first $2,500 each year. That’s as much as $500 annually.

But things can get tricky. A child can have many RESP accounts opened for him or her, but the annual top-up is allowed only once per child each year. So if a parent – or another set of grandparents – is also saving in an RESP, the grant can be applied only once.

Mr. Armstrong, though, still believes RESPs – where earnings, but not contributions, are tax-sheltered – are the best way to save, especially with automated, regular contributions. “Sometimes the easiest thing is just keeping it simple,” he says. “Instead of sending a cheque to the parents and hoping they put it into the RESP, set up an account. ... The monthly contribution grows over time dramatically.”

Odette Morin, a Vancouver certified financial planner and president of You First Financial & Benefits Consultants Ltd., says clients come to her all the time asking about saving for grandchildren’s education.

She usually recommends RESPs, but if the child’s parents or other grandparents already maximize their contribution to get the $500 grant, she suggests setting up an informal in-trust account. Less regulated and less expensive than a formal trust, though with complicated tax implications, in-trust accounts are an alternative to RESPs that allow relatives to save on behalf of children.

“It’s very flexible, easy to set up, and any financial institution can do it,” Ms. Morin says. “There’s no cost, no minimum or maximum [contributions], and it can be used for any purpose, not just education.” It’s also a good income-splitting strategy if set up properly, she says, as capital gains can be attributed to the children.

In-trust accounts can have wild consequences, though, warns Jim Yih, an Alberta-based financial educator and author of the Retire Happy blog. Because of their informal nature, taxes can be an issue; if they aren’t set up carefully, the person making the deposits may still wind up paying tax.

And then there’s the question of what grandchildren will do once they come of age: Without the regulation that comes with an RESP, they can just as easily spend the money on a motorcycle or a trip to Europe.

“It’s kind of like buying a used car,” Mr. Yih says of in-trust accounts. Sometimes they work great, sometimes there are problems out of your control.

So if you want to keep that control, an RESP may be best. It comes with the same conventional wisdom as most investments, too: Feel free to take on a little risk when the grandchild is young, but head for safety later.

Mutual funds are a good place to start, Mr. Armstrong says. They have “the safety of fixed income and the growth potential of equities.” Then, as the child nears postsecondary school, “your investment vehicle is going to change – safer-oriented products, which is fixed income.”

Target-date funds can help grandparents save easily, he says. These portfolios shift from equities to more conservative asset mixes over time, taking away both risk and worry from a gift that will help grandchildren in the future.

“If there’s something that helps a child further themselves in life and benefit society,” Mr. Armstrong says, “we should be talking at the top of our lungs about it.”



Commentary by the Ottawa Mens Centre

Another non-controversial story that the entire population is aware of, and which Globe opens to comments but, censors those who post anything that the Globe experts of propaganda don't want to see.