The bond between grandparents and grandchildren is special. You get to share your wisdom and stories with eager listeners and occasionally, you get to treat them to ice cream before dinner.
If you’re able, you may want to plan to leave a legacy for your grandchildren. One of the best ways to set them up for a successful future is to contribute to their education savings.
Four strategies that can help you make smart investment choices for your grandchildren:
1. Coordinate RESP contributions with your adult children
Registered Education Savings Plans (RESPs) are specifically designed to help parents and grandparents save for a child’s education. They offer opportunities for:
• Government matching. Canada Education Savings Grants (CESGs) match 20 per cent of your contributions up to a maximum grant of $500 each year
• Tax-deferred investment growth. No tax is due until your grandchild starts withdrawing money to pay for post-secondary education
A child can be named as a beneficiary on more than one RESP. However, there is a lifetime contribution limit of $50,000 per child and this can get complicated to track across multiple plans. Find out if your children have opened an RESP for your grandchildren, and then coordinate your contributions with theirs.
2. Consider giving your adult children the money to contribute
Rather than contributing directly to the RESP, you may want to give your children money so that they can contribute more to their child’s RESP. This can protect you from taxes if your grandchild decides not to pursue post-secondary education.
3. Complement RESP savings with your TFSA
Let’s say you plan to contribute a specific amount to a grandchild’s education savings—for example, $30,000—and you have the money available now. To maximize CESGs (assuming no one else is contributing on behalf of your grandchild), you can:
• Contribute $30,000 to your Tax-Free Savings Account (TFSA), if you have the contribution room available
• Move $2,500 into the RESP every year
That way, you’ll benefit from a TFSA’s tax-free investment growth while the money is waiting to go into the RESP. This can make a significant difference to the amount your grandchild has available to pay for his or her education.
4. Top up education savings in your grandchildren’s TFSA
When your grandchildren are 18, they can open their own TFSAs. If their education savings need a top-up, this can be an excellent place to do it.
Beyond offering tax-free investment growth, TFSA withdrawals can be used for any purpose—unlike RESP savings, which must be used to help pay for education-related expenses. That makes them a flexible source of extra money while your grandchildren are studying.
What if your grandchildren don’t need their TFSA money for school? You’ll be helping them start a lifelong habit of saving and investing—and that’s a legacy in itself.