How to save for your child’s education

There’s more than one way to save for your child’s education.

Most Canadian families start with an RESP, which has a hard-to-beat advantage in the form of a top-up to your contributions from the federal government – at least 20% for the first $2,500 you put in the plan during the years before your child turns 18, provided you meet all the requirements.

An often-cited downside to an RESP is what happens if a child doesn’t opt to go to college or university. But the rules governing that savings program have that eventuality covered. You can move the cash to an RESP held in the name of a sibling.

You also have the option to transfer up to $50,000 to your RRSP, provided you leave enough room to absorb those funds without triggering tax obligations. Start leaving some RRSP room once your child turns 14 to provide a buffer against any change in plans.

Or, if you’re particularly concerned about maintaining liquidity, there are other savings options such as TFSAs, in-trust accounts and even real estate investments that can produce income streams to fund scholarly dreams.

A concern raised about TFSAs is that unless you specifically earmark the funds for education, there will be temptations to dip into them for emergencies. It’s a legitimate concern, but rising tuition and living costs, and an increased likelihood of attending graduate school, suggests parents should have a secondary funding vehicle for education costs. A TFSA fits that requirement nicely.

If you’re certain your child’s university bound, maximize RESP contributions first and then put any remaining funds into your TFSA, if there’s room.

A TFSA can come out ahead of an RESP if you have serious doubts about a child pursuing higher education, there are no siblings to whom the money can be transferred, or you and your spouse have no RRSP room to accept any unused funds.

Other options include:

• In Trust For (ITF) accounts are available to parents and let them invest in equities. Although ITFs don’t provide the grant advantage of an RESP, they are completely flexible.
• Buying an investment property can work for parents who like to put in sweat equity, or have a good enough idea where their child will attend school to allow them to buy a property there. Before your child leaves for university, the property can generate income through rental to other students. Your child also could be paid reasonable income to help manage the property; but ensure you account for his or her basic personal exemption of about $11,000 and other deductible school expenses. Paying the child more will mean she has to pay tax on that income.
• Don’t overlook the Canada Child Tax Benefit (CCTB). This money, usually paid to parents as a tax benefit, technically belongs to the child and can be invested to compound tax-free in your child’s name. The money could also grow in an ITF account.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.