While registered education savings plans (RESPs) are the most familiar way to fund a child’s post-secondary education, there are additional options to help clients save even more, says Caroline Dabu, VP and head of BMO’s Wealth Planning Group, in Toronto. “Most parents are aware of RESPs but far fewer are aware of other options beyond RESPs,” says Dabu.
According to a recent study by the BMO Wealth Institute, 93% of parents are aware that RESPs are one way to help them save for their child’s post-secondary education. But far fewer are familiar with ways of saving even more, such as through a trust or life insurance policy, Dabu says.
So, if your client is already maximizing their RESPs, but still wants to add to an education fund, Dabu says you might consider suggesting the following five tools:
> Open a non-registered account
One of the easiest ways to help your clients save more is a non-registered account devoted specifically to saving for a child’s education. This method is a good choice, Dabu says, because it provides simplicity in its set-up and flexible administration.
For example, your clients can withdraw funds at any time and maintain control of the account indefinitely. When partnered with a disciplined financial plan, this strategy can be an effective way to help supplement educational savings over a long period of time. Just ensure your clients know that all income and capital gains generated by funds in the account will be taxable.
> Tap your TFSA
If your clients have unused contribution room in their tax-free savings accounts, they might consider moving some of their savings from a non-registered account into their TFSA.
These amounts will grow tax-free, while allowing withdrawals — under certain conditions — when clients need money for education purposes. Another option is to fund a child’s TFSA once they turn 18 or 19, depending on the province where they live.
> Create a trust
Using a trust gives some clients peace of mind, Dabu says, because the terms of the trust set out specific conditions for the use of the funds. This means they won’t have to worry about their children using the money for other purposes, such as expensive cars or vacations.
Trusts can be funded through gifts or loans, but they must be carefully documented. With this in mind, it’s a smart idea to work in tandem with qualified legal and tax specialists when establishing a trust.
> Collect corporate dividends
For clients with an incorporated family business, dividends can help lighten the burden of post-secondary education. Clients can accumulate funds in their corporate dividend account and then pass ownership of the shares, directly or indirectly, to their children. In this way, the funds will be taxed at the child’s marginal rate when they are withdrawn.
> Learn through life insurance
Many clients are unaware that whole life insurance policies can be used to save for their child’s post-secondary studies, says Dabu. The best way to use this strategy is to have your clients pay a little more into their policies than the required monthly premium. Over time, this excess can accumulate into a handsome cash value that can be withdrawn, with limitations as set by the policy, as needed.
Once the child reaches the age of majority, you can transfer the policy’s ownership to the child, who can then use the funds in the same way to finance their education. However, at this point, the funds will be taxed at the child’s marginal tax rate.
Next: Coping with “boomerang” kids.