BY: ANDREW STEWART
I was standing at the bar with a client waiting for our table to be ready. As we placed our drink order we were talking about our careers and talking about the education and path we took to get to this point in life. It was actually pretty funny but was quite an eye-opener at the same.
You see I majored in accounting for my post-secondary studies but discovered that I hated working with numbers all day. I wasn’t the strongest student in math class either, so how did I end up deciding to major accounting? Then I remembered, it was career day at my high school and a gentleman who was a CPA was telling us about his career. As he spoke it sounded ok but nothing that was overly exciting and then someone asked how much income he made. All I saw was dollar signs in my mind. I remember sitting in the basement counting pennies I collected as a kid. The point to my story and trip down memory lane is that as children, teenagers and adults what we want to be and do career-wise changes. As summer winds down and school starts we as parents will start thinking about saving and preparing for our children’s financial futures.
Most Canadian parents know about RESPs (which doesn’t necessarily mean they have them) but few are aware of alternative ways of saving for their child’s post-secondary education, and for life beyond. With tuition costs soaring and the job market looking bleak, today’s young adults are more likely than ever to finish post-secondary school burdened with significant amounts of debt. Spending years repaying that student debt will, in turn, hurt their ability to save for things like getting married, buying their first home, and starting a family.
RESPs have been around in their current form since 1998. Most people are aware of the federal grants, but I’ve always disliked how they’ve been positioned and sold to parents. If you have heard this phrase before “This is free money the government is giving parents to help fund their kids’ school.” I feel you’ve been tricked into a sale. Yes, the grants provide a 20% grant on RESP contributions but what is commonly left out is that the maximum you can get is $7,200. Currently, a four-year university degree can be expected to cost upwards of $60,000 that sum could rise to more than $140,000 for a child born this year and only 34% are taking full advantage of the government grants. In my opinion, parents wait too long to start saving, do not save consistently enough, and are not familiar enough with the rules of using these accounts.
So, what are some other options when it comes to saving money for your children’s educations, first homes, weddings and anything in between?
Use a Tax-Free Savings Account (TFSA)
By putting money into a TFSA, parents’ savings will grow tax-free and the money can be easily withdrawn in the future without having to pay taxes. The drawback is a TFSA is only as good as what you’ve invested into and there are limits to how much you can put in. It leaves you open to market gains and losses and goes against your own contribution room.
Open a non-registered account
It is easy to set up, simple to understand and offers flexibility. You can withdraw the funds for whatever reason at any time and retain control of them after your child reaches the age of majority. The downside is the temptation to use these funds for something else as well as that the parents will be taxed on all the income and any capital gains.
Open a participating whole life insurance plan
Participating whole life insurance policies have cash values that grow tax-free by paying dividends every year. The benefits of these plans are flexibility in contribution amount, payment structure and that it will last for the entirety of the child’s life.
