Kids are expensive. From diapers, soccer gear, drum lessons and even graduation dresses, over a lifetime, things add up. One of the biggest costs that tend to be a big part of our children’s lives is their secondary education. A report released from the Bank of Montreal stated that 83 per cent of parents expect to pay for their children’s college or university costs, while 44 per cent say they actually expect their child to chip in.
Either way, both options are expensive, considering the average Canadian student graduates with $27,000 worth of student debt. Here are a few ways you can maximize your savings over their growing years, and help reduce the financial burden when they start:
A Registered Education Savings Plan (RESP) is a special savings account for parents who want to save for their child’s education after high school. The best part about this account is that no investments made into your RESP will be subjected to income taxes.
The second advantage of setting up an RESP is there is opportunity to gain even more money. In 1998, the Canadian government introduced the Canada Education Savings Grant, where they promised to match 20% of any RESP contributions up to $2,500 per account, per child, per year.
A Tax Free Savings Account (TFSA) is exactly what you think it is—an investment or savings account that you are not taxed on. While there is a limit on how much can be contributed each year, a TFSA can be used for any sort of savings goal, and withdrawals can be made at any time, for free.
Most financial institutions will recommend setting up automatic withdrawals that would enable you to not exceed the contribution limits within a calendar year. While you can use the savings for anything you’d like, it may be another way to tuck tax-free money away for your children’s education.
Beyond your bank accounts, another way to increase your cash flow for your children’s secondary education is to set-up a trust account in their name. This will allow you to give your children money for their future, while having control over how the money is invested until they turn 18.
Even though you won’t pay taxes on it while you invest, once the titleholder has access, they will be taxed on their withdrawals, however, it’s typically a smaller amount since most 18-year-olds (if this is when they start withdrawing) aren’t generating enough income.
Setting up a trust can be a bit tricky, so we suggest getting in touch with a lawyer and an accountant that can help you navigate through the admin work.
Let’s say you don’t want to necessarily invest in any accountants at the time being, and would prefer to just pay for tuition on a semester-by-semester, or year-by-year basis. If you can afford to do so, then all the power to you. Many Canadian families will focus on paying off major debt or assets such as their lines of credit, cars or homes, which ultimately over time, will ease up your budgets and give you more room for cash flow.
And last, but definitely not least, talk to a financial advisor. Passionate about helping you get the most of your money, a trusted financial advisor is the best place to seek advice when it comes to savings. They’ll be able help you maximize your investments, reduce your taxes, map out where your focus should be, and help you reach your goals, such as saving for your child’s secondary education.
Whether your children are still in diapers or jumping into their freshman year, it’s never too late to prioritize their education and find new and more efficient ways to save.