Options to save for your children's education
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(Special) - With the school year back in full swing, parents across the country again are being made aware of the harsh reality of the high cost of providing an education for their children.
According to Statistics Canada, a post-secondary education can cost between $50,000 and $100,000 for a four-year degree program while private and secondary schools can cost between $6,000 and $50,000 a year. In spite of the high costs, only half of Canadian parents are using a Registered Education Savings Plan (RESP) to save for their children's education and only a third are taking full advantage of available government grants.
"Parents really need to make it a priority," says Amy Dietz Graham, investment adviser and portfolio manager with BMO Nesbitt Burns. "We get a lot of calls and inquiries but it often gets put on the back burner and people never get around to doing anything about it. You really need to make it part of your budget and financial plan and put aside a separate account dedicated solely to saving for it. That's what makes the RESP such a great plan."
The RESP has been around for many years. Under the plan parents, guardians, grandparents, other relatives or friends can set up an RESP through a financial institution such as a bank or credit union, a certified financial planner or through a group plan dealer.
A total of up to $50,000 can be contributed into a plan for each child named who is enrolled in qualified educational programs. There is no annual contribution limit and the government will add a grant of up to a maximum of $7,200.
Income and capital gains can be generated and grow within an RESP through investments such as stocks, bonds, mutual funds, and guaranteed investment certificates until the children are ready to pay for their post-secondary education. They only pay income tax on the gains earned by the plan and the grants as funds are withdrawn, which usually is low because the income of most post-secondary students is very limited.
BMO Nesbitt Burns has put together a nifty chart which compares and contrasts the savings options available including the RESP, the Tax Free Savings Account (TFSA), non-registered accounts, life insurance and trusts.
Non-registered accounts usually have no fees or contribution limits but there is no tax deferral -- all earnings made are taxable in your hands and income attribution rules apply.
The TFSA has an annual contribution limit of $5,500 plus any carry forward room since 2009. You can withdraw money tax free and then recontribute it starting Jan. 1 of the year following the year of withdrawal. Contributions are not tax deductible and you must have reached the age of majority (18 or 19 depending on the province) to set up an account. All Canadians age 18 or older accumulate TFSA room each year.
Life insurance (cash value) involves paying premiums and contribution limits are subject to the policy's set limits but there is tax deferral of earnings inside the policy during the accumulation period. When ownership of the policy is transferred to the child or grandchild at the age of majority their withdrawals of excess cash value are subject to the child's marginal tax rate.
Another popular option is an in-trust account. An adult - presumably a parent or grandparent -- can deposit funds into an investment account for a minor child and hold it "in trust" until the child reaches the age of majority. If investments produce capital gains, they will be taxed in the child's hands. With their basic personal tax credit, the child may pay little or no tax.
However, if income such as interest or dividend income is earned it is attributed to the adult and included in their income.
"Some parents may want their children to contribute to their education in some way while others may not - each situation is different," Dietz-Graham says. "The important thing is that saving for your children's education must be a top-of-mind priority that is part of your budget and financial plan."
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2016 Talbot Boggs
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