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Financial planning strategies for private school families

Planning is the key to affording private education

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Planning is the key to affording education - private education at the primary, elementary or secondary level as well as university. It's never too late or too early to start.

The best thing to do is to start putting money aside as soon as possible, says Carrie Tuck, director of marketing for Elliott & Page, a Toronto-based mutual fund company.

Affording a private education can involve a number of options, from financial assistance and bursaries to investing wisely during your child's pre-school years. Private-school tuitions can range from a few thousand dollars a year to more than $30,000 for a boarding school. And that might not include expensive necessities such as uniforms, books, field-trip fees and even meals.

And spending isn't likely to stop with a high-school diploma. Most private schools boast a 100 per cent university acceptance rate, which in most cases means at least four years of university at costs ranging from $50,000 to $150,000 (depending on whether your child goes to school out of town). As most financial advisers will tell you, planning ahead can significantly reduce the financial burden of educating a child.

"The longer you save money, the larger the nest egg will be," says Tuck. "The benefits of a longer time frame include compounding interest and dollar-cost averaging. It is more beneficial to purchase more units at a lower cost rather than in a lump sum."

One of the most popular and practical savings vehicles is a Registered Education Savings Plan (RESP). Like the RRSP, the payoff depends on what type of risk you are willing to take. Also, says Tuck, you can adjust your investment strategies according to how close you are to cashing out.

The Registered Education Savings Plan is a federal program that allows Canadians to contribute a maximum of $4,000 a year toward building an education fund for each child or grandchild for whom a plan is established. The maximum contribution allowed over the life of the plan, which must be used within 25 years, is $42,000 for each child. Unlike an RRSP, there is no tax deduction for the contributor. However, like an RRSP, the money grows in the plan tax-free.

To entice parents to invest in RESPs, the government has created the Canada Education Savings Grant (CESG). For the first $2,000 contribution to an RESP each year, the federal government kicks in an additional 20 per cent, to a maximum of $400. The CESG is available until the child turns 18. Assuming parents start a plan when a child is born and contribute $2,000 each year for 18 years, they will be able to maximize the grant to the tune of $7,200 tax-free.

"The RESP has no foreign investment restrictions, so you can invest globally," says Tuck. "Given that foreign investments tend to out-perform Canadian funds, this is a benefit to investors." Elliott and Page, the company Tuck works for, offers 22 mutual funds and an RESP with no administration fees.

There's a catch, of course. Although you can name one or more beneficiaries, if none of them enrols full-time in a post-secondary school by age 21, you have to return the grant money to the government.

But you can get your original contributions back. If the plan has been in place for at least 10 years and the child has reached the age of 21 but has not received post-secondary education, up to $50,000 can be transferred tax-free to the contributor's RRSP or the spouse's plan. Whatever you can't transfer becomes taxable income and is taxed accordingly.

If you are concerned your kids may choose a backpack and Eurorail pass over textbooks, but you want to set aside some money for them anyway, there are other alternatives to the RESP.

Setting up a trust fund is one alternative and there are two types - formal and informal. Gary and Michelle Williams of Burlington, Ontario, discussed saving for five-month-old Lucas before he was born and opted for an informal trust fund.

Informal trust funds are usually used for smaller sums of money. Again, taxes are paid on income and dividends. But informal trusts can be opened through most banks or financial institutions without the help of a lawyer and typically do not carry administration fees.

"We knew this was something we were going to do, so we talked to our financial adviser about saving for university when Michelle was pregnant," says Gary Williams. "We decided to go with an informal trust because we can't ensure the money is going to be used for education and I can keep more control over how and when the money will be used."

When the informal trust is cashed in, recipients have to pay capital gains taxes. Also, recipients gain full control of informal trusts at age 18 and are free to do what they wish with the money and they are non-transferable.

The Williams are putting $100 a month into the trust fund, and plan to put money Lucas receives for birthday and Christmas gifts into the fund.

"Obviously, we want Lucas to use the money for education. But the benefit to the trust fund to me, versus the RESP, is that he may want to start his own business or invest in another venture. This way I can say, "Here's the money. Go use it.' You never know, this is 20 years down the road," says Williams.

Formal trust funds are generally used for large sums of money, usually more than $50,000. These funds typically come with strings attached, such as how and when the money can be used. You need a lawyer to establish a fund, which means fees for set-up and annual administration. And the trust is a legal entity that has to pay taxes on income and dividends.

The final option, besides a traditional savings account, is mutual funds. A mutual fund is usually opened in a parent's name. However, just as with an RESP, children need a Social Insurance Number to have their own accounts, no matter whether they are six weeks, six months or 16 years old.

Mutual funds provide the flexibility of accessing the funds at any time, changing investment strategies and using your money when and how you want.

"A non-registered account is a lot easier to manage," Tuck says. "The downside is you pay tax every year." Mutual fund dividends, interest income and capital gains are all taxed in the contributor's name.

The best thing to do is start early. Figure out how many years you have to save before your child is ready to go to university or college and how much money you would like to have saved. Assuming a possible eight per cent annual rate of return, calculate how much you have to save every month, or year, to reach your goal.

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