As a parent, one of your biggest hopes and dreams for your child is to see him/her successfully graduate from college or university. However, considering the cost of education these days, that may be easier said than done.
Over the past two decades, college costs have been continually rising and they are expected to continue climbing even more in the coming years. If post secondary costs continue to grow at the present rate, it is projected that by the year 2037, tuition will cost over $125,000 with residence fees and nearly $70,000 without residence for a four year program. This means that parents need to start saving money for their kids early to afford higher education in the future.
Luckily, there are several tools and savings plans that parents can use to pool money for their children’s education.
A Registered Education Savings Plan (RESP) is a plan that uses direct government assistance to help parents save more money for their children’s future education. RESPs are tax-sheltered, which means that all deposits made cannot be subjected to any form of taxes whatsoever. This is done to inspire parents to make more deposits and increase their savings amount.
The government also matches all contributions made to an RESP with 20% grants, contributing a maximum of $500 a year. In a lifetime, parents can expect up to $7,200 from the government in government grants, as stated by Heritage RESP. Heritage RESP is one of the best RESP providers in Canada as per the many Heritage RESP reviews available online.
- Reduce expenses
Between the video games, sports classes, extravagant birthday parties and play centres there are always places to trim. Instead of spending $400 for your child’s birthday to rent a party room and buy food and drinks and decor for the party, you may want to consider doing the party at home and saving money on the rental and decor fees. Consider cutting your child’s birthday party back to $200, and investing the other $200 into an RESP. You’ll immediately have $240 in the account, and you’re still having a party. Save even more by making your own cake instead of ordering one from the bakery.
3. Pooled RESPs
Pooled RESPs are sometimes known as scholarship trusts or education trusts. Contributing to a pooled plan means that you will purchase units into a pool of investors. Typically the pooled programs will only invest in fixed income securities. If you were to buy units of these pooled RESPs, you would have no control over the investments.
You have to really be careful about the details of these contracts especially when it comes to fees. According to Perry Quinton, Investor Education Officer of the Ontario Securities Commission, “You can expect to pay enrollment fees, administration and management fees, sales incentive fees, trustee fees, custodian fees and transaction costs.”
Most people prefer a family or individual plan because they offer much more flexibility all around.
- Informal Trusts
Informal trust accounts are similar to a regular savings account except that it is owned ‘in-trust’ by the parent, grandparent or guardian on behalf of the child. It is considered informal simply because there are no formal trust documents signed.
The benefit of an in-trust account is that some of the tax may be taxable to the child depending on the type of income the investments produce. This is beneficial because the child typically has no income and therefore pays no tax, or tax at a very low bracket depending on the amount.
Any capital gains generated by the investment are taxed in the child’s name. Dividends and capital gains are taxed in the parents’ name. Therefore, the ‘in-trust’ account favours growth investments like equities.
If you are investing money into an in-trust account, the deposits are irrevocable. Meaning the funds are owned by the child. If the parent decides to take the money out and use the funds, he or she will have to pay the tax on the capital gains.
Similar to savings accounts the money saved can be used for any purpose and not just for education. For example, this money could be used for a myriad of options like buying a car, traveling, putting a down payment on a house, or maybe to start a business, etc.
- RRSPs – Lifelong Learning Plan
The government introduced new legislation that you can withdraw money from your RRSP for the purpose of education. The Lifelong Learning Plan allows an individual to withdraw up to $10,000 per year up to a maximum of $20,000 from the RRSP over a four-year period. The withdrawal must be paid back over a 10-year period, otherwise it will be added to your income and then taxed. For more information, you can search the government website https://www.canada.ca/en/revenue-agency/cra-canada.html