I have five children and would like to start preparing for their future, primarily their education expenses. What do you suggest as the best place for me to start?
The most familiar way of saving for your children’s post-secondary education is the Registered Education Savings Plan (RESP). This plan is an important component of education saving. You can learn more about the RESP program in another Ask the Expert answer here. In this article, we’ll explore other tools to save for your children’s education. These tools can also be used for most other savings goals.
You may wish to consider setting up a non-registered savings account specifically for your children’s education and contributing a monthly or yearly sum. As a non-registered account, there is no restriction on the amount you can invest, how it is invested, and how it is spent. The drawback is that the investment income earned on these funds will be taxed in the name of the person contributing the funds. Choose an investment strategy that takes into consideration your time frame and risk tolerance.
A tax-free savings account (TFSA) is another option. In a TFSA, all the growth is tax-free, but you are restricted as to how much can be invested each year. You must be at least 18 years old to set up a TFSA and the contribution limit for 2016 has been reduced to $5,500.
You may wish to consider investing in a whole life insurance policy, which allows you to accumulate excess cash in the policy that can be withdrawn to fund your children’s education. You need time to accumulate the excess cash, and once you put the money into the policy you no longer have control over or access to it, and you can only withdraw the excess cash. You should consider doing this when your children are young so there is time for the excess cash to grow. The growth is tax-deferred.
If you own a corporation (i.e. if you are an incorporated midwife), you can issue shares to your children or to a family trust. Once the children have reach 18 years of age, then you can pay dividends to them and each child can receive up to approximately $40,000 tax free. Using a discretionary family trust gives you control over the assets of your company as well as who the dividends can be paid to. This option is more expensive to set up and there are yearly costs associated with it. Issuing shares to your child also has several considerations and challenges. Both these options should be discussed with a professional advisor.
Once your child turns 15 or 16, discuss how a summer and/or part-time job can help to provide funds towards their educational expenses. Having your child involved in the savings process can help with creating a commitment to their education. You can also use these funds to teach them about budgeting and money management skills.
When your children are in their last year or two of high school, you can begin discussing and investigating the various government financial aid programs such as scholarships, bursaries, grants, and student loans. Most colleges and universities in Ontario also offer scholarships and bursaries. All are excellent sources of funding for postsecondary education. Some may be based solely on financial need, while others may be based on grades and/or community involvement and extracurricular activities. There are even private scholarships available through community organizations or corporations; it’s worth doing some research to see what may be available for your children. Scholarships Canada (www.scholarshipscanada.com) is one source of information on scholarships, bursaries and grants available to students in Canada.
Whatever strategy you choose, the most important aspects are to start early, put money aside on a regular basis using good investing strategies, and involve your children in the process when they are old enough. -JRTop of page