Beyond RESPs
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 diploma1. There’s the increased opportunity for employment as many 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 the 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 future education costs. 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 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 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 almost $20,0003.
- If you take all costs into account - living expenses, compulsory fees, etc - on average a full-time 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 post-secondary education to avoid burdening them with huge student loans or the extra stress of a part-time job during the school year.
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 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 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 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.
- 2006 Census Data
- Statistics Canada, The Daily, October 9, 2008
- Statistics Canada, The Daily, April 26, 2004
- Statistics Canada, The Daily, September 10, 2003
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This article, written and published by Investors Group Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
Insurance products and services offered through I.G. Insurance Services Inc. (in Quebec, a financial services firm). Insurance license sponsored by The Great-West Life Assurance Company (outside of Quebec).
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
