Increasing numbers of grandparents are helping out their grandkids in a very tangible way these days. They are stepping in to help them finance their university or college education – the price of which has soared in recent years.
Consider this. According to Heritage Education Funds Inc., using figures from Statistics Canada and the Canadian Centre for Policy Alternatives, the projected cost of a four-year undergraduate degree starting in 2015 is expected to be $68,933 for students living away from home. This is a terrifying expense for all but the wealthiest among us to contemplate, so it’s never too early to start thinking about how to fund it.
What I want to do today is offer a brief summary of what your options are as farsighted grandparents ready, willing and able to help out your grandkids as they start out in life. Some of the options I cover are obvious – RESPs for instance – but there are other possibilities out there that many of you may overlook. I have identified six investment vehicles for you to consider.
1. Registered Education Savings Plans (RESPs)
RESPs are the most popular way for grandparents to save for their grandkid’s higher education. Money placed into these investment accounts can grow tax-free. Through the Canada Education Savings Grant, the federal government provides a 20-per-cent grant on RESP contributions of up to $2,500 a year. A suggestion. If you take this route, instead of sending a cheque to the parents and hoping they put it into the RESP, set up an account yourself and monitor the payments. You’ll find that the monthly contribution grows rapidly over time.
2. Tax-Free Savings Account (TFSA)
By putting money into a TFSA, the savings of a grandparent will grow tax-free and the money can be easily withdrawn in the future to help finance a child’s education. TFSAs are attractive from a tax point of view because withdrawals are not taxable. Withdrawals from RESPs are considered taxable income for the beneficiary however, although many students will end up paying zero in taxes because their overall incomes are low.
3. Whole Life Insurance
Whole Life Insurance policies, available from such mainstream financial institutions as Sun Life Financial, Canada Life and others, have a fixed premium, meaning you pay the same amount each year for your coverage. Much like universal life insurance, whole life has the potential to accumulate cash value over time, creating an amount that you may be able to borrow against.
Whole life insurance is preferable to universal life insurance – they are frequently confused – because it takes away stock market risk yet still delivers tax-preferred savings growth – funds you can use to finance your grandkid’s education.
4. Open a non-registered account
The benefits of opening a non-registered account specifically for the purpose of saving for your grandkid’s schooling is that 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 grandchild reaches the age of majority. The downsides are the temptation to use these funds for something other than your grandchild’s education. And you will be taxed on all the income and any capital gains derived from the account.
5. Set up a trust
This is a legal agreement where money is transferred from one person to another according to specific terms. It is a good way to manage, control and protect funds because it gives a grandparent the peace of mind of knowing that the money will be used for its intended purpose. It is important to set up the trust properly with a written agreement that outlines terms and conditions. There are also tax consequences to consider, depending on how the trust is funded.
6. Pay out corporate dividends
If you are incorporated or have an incorporated family business, you could build up savings in your corporate account and pay them out in the form of a corporate dividend at a later date to pay for your grandchild’s education. Your grandchild would need to own shares of your company. The benefit of this is that the dividends will be taxed in the hands of your child, who will presumably have a low income.
Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604-535-4721