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Will You Save Enough For Your Children's Education?

The cost of a post-secondary education has been rising steadily since the late 1990s. Some put the cost at over $12 000 a year at a Canadian university. If your children will be attending a U.S. college, the annual cost could be much higher. Recently, private universities and colleges have been set up in several provinces with much higher tuition than government-supported institutions. Many parents now wonder if four years of post-secondary education will be enough for their children. To compete successfully in today's workplace, it's increasingly necessary to have a post graduate degree. Chances are that your son or daughter won't earn much more than minimum wage during the summer, so the burden of covering education expenses will largely fall on your shoulders. But just how much will university cost and how much must you save each year to ensure your children get the education they need?

What Will It Cost?

Today, four years of university will cost about $51,700 using the $12,000 annual estimate and a 5% inflation factor for tuition, living expenses and other costs. In five years, that rises to $66,000. In 10 years it jumps to $84,200, to $107,500 in 15 years and to $137,200 in 20 years. Let's assume your three-year old will be entering university 15 years from now. To ensure he or she gets through four years, and ignoring summer earnings, you will have to save $107,500. If you can earn 6% after-tax on your money, you will have to put away almost $40,000 today to ensure that amount is available. At 8% after-tax, you need to invest only $29,000 starting today. Most parents don't have this kind of money lying around, so they will have to save a specific amount each year. At the 6% after-tax rate, you would have to invest about $3,600 each year for, say, 17 years. At the 8% rate, only $2,950 would have to be invested annually. That's big chunk out of anyone's budget, and if you have two or three children, you must double or triple your savings.

How To Boost Your Savings

There are several ways to make your savings work harder, which means you may be able to put aside less each year and still end up with enough for university expenses. First, investigate RESPs (Registered Education Savings Plans). While contributions to the plan are not deductible, income earned in the plan is tax-sheltered until distributed to the student beneficiary, whose income will likely be too low to attract tax. As well, contributions are eligible for up to $400 a year in government assistance under the Canada Education Savings Grant program.

In Trust For (ITF)

ITF accounts are an excellent way to give money to children without handing them cash. Teach your children the merits of investing by providing them with a first-hand example. Take advantage of the opportunity to save money by having your children pay the tax on any capital gains.

ITF accounts are set up with a trustee, a beneficiary and a contributor. The trustee and the contributor must be different people in order for the contributor to reap any tax benefits. The child is the owner of the account, and thus all money must revert to the child if it is withdrawn. Let your Advisor guide you through opening an ITF account. Your young ones will thank you for it. Finally, be sure to invest the child tax benefit in your children's names. Any income earned on the funds is taxable to your children.

We can help you set up the most efficient programs that will allow you to accumulate the funds necessary for your children's post secondary education.