Beyond RESPs: Saving for school
Options to help what you're saving match what you'll need
You want the best for your child – and for plenty of powerful reasons, a college or university education is one of the best things you can do to give them a great start in life. There’s the increased earning potential, of course – the average university graduate earns almost twice as much as someone with a high school diploma.
There’s the increased opportunity for employment as many jobs now require a postsecondary education and having a degree or diploma is bound to become even more important in the future. And there are the valuable life lessons and relationships that are an essential part of the postsecondary experience.
Registered Education Savings Plans (RESPs) are savings vehicles offered by financial insistutions that are similar to traditional Registered Retirement Savings Plans (RRSPs): They can hold the same investments and reflect the contributor's willingness to accept risk.
RESPs can be used only for post-secondary education, but they're well worth starting as early as possible because of some noteworthy benefits. For example, while you don't get a deduction when you contribute, the income earned grows untaxed.
RESPs are the first choice
The Registered Education Savings Plan is a federal program that allows Canadians to contribute a maximum of $4,000 a year toward building an education fund for each child or grandchild for whom a plan is established.
The maximum contribution allowed over the life of the plan, which must be used within 25 years, is $42,000 for each child. Unlike an RRSP, there is no tax deduction for the contributor. However, like an RRSP, the money grows in the plan tax-free.
Here are some sobering facts about the dramatically escalating cost of a post-secondary education:
- On average, undergraduate tuition fees have more than tripled since 1990. Today, a student attending a full-time college or university program can expect to pay an average of $4,724 a year in tuition alone2.
- Nearly 50 percent of Canadian college and university graduates leave school owing money for their education – with college graduates owing about $13,000 and university graduates almost $20,0003.
- If you take all costs into account - living expenses, compulsory fees, etc - on average a fulltime university students will spend approximately $11,200 for a full 8 month term in session. That’s over $44,000 for a four year degree4.
Beyond RESPs — further tax-efficient saving strategies
All this means is you need every advantage you can get when saving to help your children pay for a postsecondary education to avoid burdening them with huge student loans or the extra stress of a part-time job during the school year.
Most people think of life insurance as basic financial protection for loved ones but a universal life insurance policy can also help fund your child’s education. A universal life insurance policy is a blend of life insurance protection and investment accounts. As the owner, you select a face amount of the life insurance, the type of coverage needed, and the name of the insured—your child, in this case. You pay the insurance premiums, which are usually quite low for a minor, and within certain limits you can make additional payments. Those additional dollars are then invested to grow over the life of the policy on a tax-deferred basis—making this accumulation the policy’s primary benefit.
At any point after your child turns 18, you can choose to suspend further premium payments and transfer ownership of the policy to the child. This is a tax-deferred transfer that gives the child the ability to draw on the policy’s cash values to pay university costs. And, since the policy is now owned by the child, the taxable portion of any cash withdrawals is taxed at the usually lower marginal tax rate of the child.
Tax-Free Savings Account (TFSA)
After maximizing your RESPs, contributing additional after-tax dollars into a Tax-Free Savings Account (TFSA) accelerates your education savings plan as earned interest, dividends, capital gains and even withdrawals do not generate a tax liability.
Tax-advantaged mutual funds
This unique mutual fund structure gives you the freedom to rebalance the investments in your nonregistered portfolio, without triggering capital gains and incurring an immediate tax liability as a result of the switch. You enjoy the substantial benefits of compound, tax-deferred fund growth and the ability to choose a date to utilize the tax efficient withdrawals that can be used to supplement your child’s education budget.
Monthly Income Portfolios
This mutual fund option allows you to create a stable, tax-efficient, monthly cash flow that can be used to support your child. A portion of the monthly payout is treated as a return of capital and is not taxed in the year that it is paid out. This tax deferral feature can reduce the amount of tax that you would pay compared to withdrawing funds from other types of investment vehicles.
Age 40 trust
If you are planning to put away a large sum of money, a properly structured age 40 trust can be an effective means of accumulating capital for education. It provides income-splitting opportunities so that capital appreciation may be taxed in the beneficiary’s hands, typically at a lower rate than you would pay. And when funded with a loan, you can retain access to the principal, giving you the flexibility to decide how trust funds should be used, regardless of whether the beneficiary pursues a post secondary education. When the time comes, you want your children to be able to afford the college or university program of their choice, to follow the career they want and to obtain the earning power they desire. Your Investors Group Consultant will design a plan to help you make the best RESP and beyond RESP investment choices for your life and theirs.
1 2006 Census Data
2 Statistics Canada, The Daily, October 9, 2008
3 Statistics Canada, The Daily, April 26, 2004
4 Statistics Canada, The Daily, September 10, 2003