Financially Speaking

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 your child 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. Over a 30 year career, that could add up to $1.2 million of additional income.   There’s the increased opportunity for employment – seven out of ten jobs now require a post-secondary education and having a degree or diploma is bound to become even more important in the future.  And there are valuable life lessons and relationships that are an essential part of the post-secondary experience.

RESPs are the first choice

But you already know all that – which is why you contribute to a Registered Education Savings Plan (RESP) for your child. After all, for the vast majority of Canadians, an RESP is the most effective way to create an education fund that grows to offset the future cost of education. However, when was the last time you checked to see how much of the total education bill your RESP will actually cover?

Here are some sobering facts about the dramatically escalating cost of a post-secondary education:

• On average, undergraduate tuition fees have almost tripled since 1990-91.  A student attending a full-time college or university program today can expect to pay an average of $4,500 a year in tuition alone.

• Add books, supplies, transportation, and other living expenses and university students living at home spend an average of $4,500 on ‘non educational’ items, while students living away from home spend an average of $8,160 on ‘non educational’ items.

• The cost of mandatory supplies and equipment for college and trade schools varies widely and can be between $50 and $5,000.

• Schools are increasing fees for programs that may offer a larger financial payback upon graduation, such as  law, medicine, engineering and dentistry.

• Nearly 50 per cent of Canadian college and university graduates leave school owing money for their education – with college graduates owing about $13,000 and university graduates owing almost $20,000.

• It is estimated that by 2025, the total cost of four years of undergraduate education away from home may be between $75,000 and $100,000.

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 post-secondary education – to avoid burdening them with huge student loans or the extra stress of a part-time job during the school year. Consider the non-registered investment strategies that can deliver important savings beyond RESPs.

Insurance – 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 in a variety of investment funds to grow over the life of 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-advantaged mutual funds – This unique mutual fund structure gives you the freedom to rebalance the investments in your non-registered 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 utilise 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 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 fund 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 that 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. We can help you make the best RESP and beyond RESP investment choices for your life and theirs.