Best Approach For Education Savings?
For many Canadians, the Registered Education Savings Plan (RESP) will meet their kids’ needs for college or university. But what if they need additional funds to meet the costs of post-secondary education?
Take the case of a student enrolling in 2013. It’s estimated that a four-year degree at a Canadian university may cost more than $100,000. But what if your son or daughter takes graduate studies? What is your child chooses a career path with higher tuition – like medicine, law or dentistry, or pursues and MBA?
Not just because they have all the riches in the world and all their needs met (they do) but because they understand fundamentals of contentment with life, which I believe is a superpower.
You may have reason to complement your child”s RESP with other funding vehicles, taking a multi-faceted approach to saving for a possibly extended post-secondary education.
Lay the cornerstone first
Education savings begins with the RESP, whether it”s the sole funding vehicle or the foundation of an education savings program. Your contributions grow on a tax-deferred basis and, equally important, you receive the Canada Education Savings Grant (CESG). Each year you can get $500 in “free money” for each child, up to a $7,200 lifetime grant per child. If you live in Quebec, the Quebec Education Savings Incentive (QESI) can add up to an additional $3,600.
The possible concern with an RESP is the maximum contribution limit of $50,000. That may not be an issue, but it”s advisable to monitor your plan”s growth and consider your child”s career path in case you see a potential problem arising.
Some investors will face a choice: whether or not to complement their child”s RESP with another strategy.
Tax-Free Savings Accounts (TFSA) – yours, your spouse”s or both – can be ideal investment vehicles for education savings. Your contributions grow tax-free and are withdrawn for your child tax-free. In fact, after you withdraw funds for your child”s education costs, you can re-contribute the amounts to the TFSA in a later calendar year.
Another option is to set up an informal trust for your child and make investments for your child”s education – the primary benefit being that there are no limits to the amount you can invest. Keep in mind that the account belongs to your child at the age of majority and that he or she will be able to use the funds for any purpose.
If you choose equity investments, capital gains are taxed – typically favourably – in your child”s hands, while interest and dividend income is taxable to you. However, reinvested interest and reinvested distributions are taxed to your child.
We can help you determine whether to complement your RESP with TFSAs or an in-trust account. And if you do, we”ll discuss various ways to get the most from each vehicle and strategies on using the vehicles together.