Planning for Education
Now that the school year has come around again, you’ve probably spent some thinking about how to fund your child’s (or children’s) education without indebting the whole family to the government and to the banks. The good news is, from a tax and investment perspective, there has never been a better year to bring education funding into your financial plan.
Using a combination of two widely available investment programs, you can put your family ahead of the game: the Registered Educations Savings Plan (RESP) and the Tax-free savings account (TFSA). The RESP is a tax-deferred savings account that allows you to save money for your child’s education (or the education of an unrelated child whose educational needs you are looking out for) without worrying about paying tax on the earned interest or dividends. When you contribute to an RESP, unlike the similarly named RRSP, the contributions are not tax deductible – so keep in mind that this strategy won’t get you a refund cheque. What you will get (assuming you’ve taken advantage of this program when the child beneficiary is young enough) is a partially matched government grant that will add potentially hefty contributions to the savings plan.
When you contribute to an RESP, you will receive a 20% matching contribution in the form of the Canada Education Savings Grant (CESG). The maximum CESG amount for each year is $500 (With a lifetime maximum of $7200). Using this strategy, it wouldn’t be practical to deposit more than $2500 into the RESP on a yearly basis, since you won’t get any more matching dollars over that amount. The grant, along with your RESP contributions, will grow on a tax-free basis. When the RESP beneficiary withdraws the money to pay for educational expenses, the income is taxed in the young one’s hands. Considering that most students have very low annual taxable income, and considering the tax deductions and credits available for most full-time students, the amount of tax they should expect to pay after withdrawing RESP money is usually fairly low – if anything at all.
The Tax Free Savings Account is another useful tool for stashing away long-term education savings. Like the RESP, investment growth inside the TFSA is not taxed while it remains invested. Unlike the RESP, there is no government matching. That’s okay – the TFSA has a special perk which more than makes up for that. When funds are withdrawn from the TFSA, none of the growth is taxed. At all.
Each year, every Canadian over the age of 18 is allowed to make a flat $5000 contribution into a TFSA. In the case of a two-parent household, it’s not unusual for the higher income earner to make all of the contributions (i.e., deposit $5000 into his or her own account, then deposit another $5000 into the account of the lower income-earner), to get a nice break on taxable investment growth. Which means that $10,000 of savings per year can grow tax-free in every household.
Now here’s where the fun part starts. You can contribute $2500 each year to your child’s RESP (and pick up the $500 grant), and then deposit any extra available savings (up to $5000) in your TFSA. When your bright, young prodigy hits 18, you can then withdraw the funds tax-free from your own TFSA, and deposit it into a TFSA set up in the student’s name. The student can then withdraw the funds as necessary, pay no tax on the withdrawals and, at the same time, you have freed up room to make TFSA contributions for your own long-term savings.
Being financially fit includes giving your children a headstart on their education, helping them understand the true value of money and making sure your family doesn’t get saddled with debt for that academic pursuit. Pick up the phone and get started right away.
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Tags: Education
This entry was posted on Monday, September 21st, 2009 at 3:51 pm and is filed under Education. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
