Average undergraduate tuition fees have risen to just under $6000 a year in Canada since 2010; an increase of 16% in just five years. This rate of increase (3%) has outpaced the rate of inflation (average 2%). At this pace, post-secondary education for a child born this year will cost over $10,000 a year. Following are four great ways to start saving now; next time, we’ll cover three more for a total of seven great strategies:
1. Save the UCCB. With the delivery of the enhanced UCCB (Universal Child Care Benefit) payments last month, frugal parents who invest the bonus will have education worries covered – for at least a year. Over an 18 year period, the total receivable is $17,280, less taxes payable, if any. The pre-tax payment is $60 a month ($720 annually) for children 6 to 17 years of age and $120 a month ($1440) for children up to the age of 6. If the UCCB is saved in a separate account in the name of the child, any earnings on the deposits will be taxable to the child and will likely be received on a tax-free basis maximizing accumulations.
2. Leverage The RRSP Opportunity. Few are aware that tax free withdrawals can be made from an RRSP under the Lifelong Learning Plan. This is a great way to leverage RRSP accumulations when educational opportunities arise. Of course, the RRSP deposit itself will generate tax savings that can be used for education funding too, provided the contributor was taxable. Note, however, that the new contributions must remain in the plan for at least 90 days or there will be no deduction for the contribution.
Making an RRSP contribution for students whose net income is over the Basic Personal Amount is wise. . .a parent (or other supporting individual) may be able to transfer more of the tuition, education and textbook credits available to their own return.
3. The Tax Free Savings Account is a great option too. You must be 18 and a resident of Canada to open the account. It’s a perfect place for grandparents to save to fund their grandchildren’s education. There is no deduction for the deposit, but the earnings are tax free and you never lose the TFSA contribution room. That means you can replenish the TFSA to save for grandchild 2, 3 or 4.
4. Savings “In Trust”. Parents may also simply save money in a non-registered account held “in trust” in the name of the child. Planning investments to earn capital gains will help you avoid the Attribution Rules, which otherwise require adults to report interest and dividends earned on funds transferred to a minor.