Many parents consider college or university education important. In fact, statistics provided by the Government of Canada indicate that a high school graduation is three times more likely to be unemployed than a university graduate.
If you are thinking of saving for your child’s education, here are five savings strategies you can use.
Registered Education Savings plans (RESP)
An RESP is a savings plan that allows your savings to grow tax-free until needed for college, university or some other eligible post-secondary institution.
Contributions are not tax deductible but the investment income earned will not be taxed until withdrawn. When withdrawn, the funds must be used for education and is taxable to the student and not the contributor. Typically, the student will not pay any tax on the funds due to low income and available tax credits.
Using and RESPs will also allow you to take advantage of the Canada Education Savings Grant (CESG) which at the basic level kicks in 20% of your contributions up to specified limits.
Advantages of RESPs: Income earned on the investments is tax-free until used for education, the government offers a grant for contributions to the account, and you can withdraw your contributions if your child does not attend a post secondary institution.
Disadvantages of RESPs: There is no tax deduction for contributions made to the account and the grant is foregone if the child does not attend school.
Gifting Through Informal Trusts
If you have some assets or cash available now to invest for your child’s education, you could use an informal trust account (or In Trust Account) established at your financial institution.
A child under 18, cannot own property and an informal trust is a form of account where the child is the beneficial owner and an adult has legal title to the investments. When the child turns 18, they become entitled to the assets in the account.
When gifting to your child you should be aware of the attribution rules. These rules can result in some of the investment income to be taxed in your hands.
Advantages of Informal Trusts: Simple to establish.
Disadvantages of Informal Trusts: There may be tax consequences if you gift marketable securities and the attribution rules may apply. In addition, the child will be entitled to the funds at age 18 and can use those funds for any purposes.
Invest CCTB & UCCB
If you receive the Canada Child Tax Benefit (CCTB) or the Universal Child Care benefit (UCCB), you can place these funds into an informal trust without the attribution rules mentioned above applying.
With the exception of the absence of attribution, the advantages and disadvantages are the same as those in an informal trust.
Establish A Formal Trust
You can also establish a formal trust that has provisions that require the funds to be used specifically for education or some other purpose. By placing limits on the use of funds, you can ensure that the gift is used as intended.
Advantages of Formal Trusts: You have control over the use of the funds.
Disadvantages of Formal Trusts: You will need the services of an accountant and lawyer to establish the trust. In addition, the income tax situation becomes more complex.
Purchase A Universal Life Insurance Policy
A universal life insurance policy has two components to them: A life insurance component and an investment fund, where the investments can grow tax-free until withdrawn.
Essentially you take out a universal life policy on yourself, joint-life, first to die and would include a term component that will last until the child turns 18. Any funds contributed to the investment component grows tax-free.
At age 18, you give the policy to the child who can then withdraw the funds from the investment account and use it for education. The withdrawn amount is taxable in the child’s hands and at their tax rate.
Alternatively, if you or your spouse, passes away prior to age 18, the term insurance pays to the survivor tax-free that is used to funds the child’s education.
Advantages of Life Insurance: In addition to the tax-deferral of investment income, the child’s education is covered in the event of supporting parent’s death, you have control over the funds invested in the policy, the funds can be used by the parents for any purpose and there is no requirement to gift the policy to the child.
Disadvantages of Life Insurance: Insurance products can be complicated and sometimes expensive.
This list contains some of the more common methods saving and funding education costs. It is by no means comprehensive.
Share your thoughts below: How do you save for your children’s education?