Should you save for retirement or your kid's education?

Three quarters of Canadians have set up Registered Education Savings Plans (RESP) but many of them lack a basic understanding of how the program works according to a survey released by CIBC this week.

If the poll of 1,000 is any indicator of how Canadians fare in general, the good news is the majority of parents are on their way to helping their kids with their education – which CIBC estimates will come with a $100,000 price tag for a four-year education.

But what about the parent’s life plans? What about retirement? And paying the house down?

It seems like those tuition fees trump retirement according to HSBC’s recent Value of Education report, which found that half of Canadian parents consider saving for their kid’s education more important than saving for their own retirement.

And according to savings experts, it’s not necessarily a bad stance to take.

Paul Shelestowsky, a certified financial planner and senior wealth advisor at Meridian Credit Union’s Niagara-on-the-Lake Branch, says he’s thought a lot about the issue and come to the conclusion that if you truly can’t pull off both at once, stashing away savings in an education fund for your kid is a smart play.

“It’s all about the time frame… for both the earlier you start, the better, but even if you start day one from an RESP you really only have 17 years to save – for an RRSP you could have 40 years to save,” says Shelestowsky. “The more logic you put behind it, the more the math and plans support RESPs.”

Plus, the RESPs give you guaranteed money from the government to grow those savings, says Nathan Parkhouse, a certified financial planner at Parkhouse Financial.

“Any contributions made to an RESP up to a maximum allowable amount of $2,500 per year the child was born will give you a 20 per cent return on your money… the growth is sheltered from tax,” he says. “If you’ve got money coming to you that’s guaranteed, if your plan as the parents is to fund your children’s education – even if it’s just a portion of it – then taking advantage of the grant provided by the government should be a part of it.”

And if your kid decides to skip school in favour of becoming a professional water skier or the next Bieber, there are exit strategies for pulling your money out of the RESPs says Shelestowsky.

“It’s possible to roll you contribution to an RESP into an RSP if you have the room,” he says adding that advisors can walk you through how to wind it down in the most tax strategic way possible. “An RESP can stay open for 36 years so even if your kid decides to take five years off, don’t close it out… let it grow tax free.”

But seriously, says Parkhouse, and Shelestowsky tends to agree, forget the hypothetical either/or; if you have to do one or the other, the true answer is: both.

“In the same way that one would diversify their assets, one should diversify cash flow towards different goals,” says Parkhouse. Make a contribution, get a grant, fund your TFSA for your retirement and if you decide you want to use it towards your child’s education as opposed to taking a line of credit on your house after you pay down your mortgage then you have that option. “At least you have two or three different goals being worked on simultaneously.”