Saving for your children’s future

Children may be a priceless gift in the lives of their parents and families, but they’re a pricey gift as well. And like most everything else in life, they’re becoming pricier.

Children may be a priceless gift in the lives of their parents and families, but they’re a pricey gift as well. And like most everything else in life, they’re becoming pricier.

The Canadian Council on Social Development estimates it costs about $167,000 to raise a child these days. This doesn’t include the cost of sending your child to university and is based on the assumption that you never give them a penny after they turn 18.

The first year of little Billy or Jane’s life is the most expensive, at more than $10,000, while year 12 is the least expensive at $7,000.

Given the cost, it’s not surprising that many Canadians start setting aside money for their children and their education as soon as possible.

There are a number of ways Canadians can save for their children who are Canadian residents.

One of the best-known is the registered educational savings program (RESP). This is a registered account set up to save for the future education expenses of the account’s beneficiary.

There is a lifetime cumulative maximum contribution of $50,000 per child but no yearly limit.

RESP contributions qualify for the Canada Education Savings Grant (CESG).

The government contributes up to $500 (carry forward room can increase that amount to $1,000 a year) or 20 per cent of your contributions per year with a cumulative lifetime maximum grant of $7,200.

The money earns interest or returns until the child starts withdrawing the funds, which are taxed in the hands of the child, when income tends to be low as a student. By using personal tuition, education and textbook tax credits, the funds withdrawn often can be received tax-free.

There is one big drawback to RESPs.

“If your child decides not to pursue college or university, all of the RESP benefits are lost,” said Cleo Hamel, a senior tax analyst with H&R Block. “The CESG has to be paid back and any returns earned in the RESP are now taxable in the hands of the account holder.”

There are some other ways to save money for the benefit of a child.

Juvenile life insurance is a sometimes overlooked way to put away money for a child. This is permanent life insurance that you buy for a child at much lower rates than you would pay as an adult.

Some of the money in the policy builds up cash value as the child grows. You decide when the child takes charge of the policy.

The child can then decide either to take the cash value out or borrow against it for an education. Both options have costs associated to them.

If the child takes the cash, they will get a lump sum equal to the cash value but will have to pay tax on all investment income, and they lose their insurance coverage.

If the child borrows against the cash value, they can borrow money as they need it from the insurance company or other financial institutions, but they may get a lower interest rate than they otherwise would.

Parents who receive the child tax benefit, the universal child care benefit or child tax credit can deposit the benefit directly into a savings or investment vehicle for a child.

Registered retirement savings plans are not generally considered useful for saving for a minor because the child typically doesn’t have enough income from which to deduct the contributions.

However, Hamel suggests that children begin filing a tax return as soon as possible.

“If your child is working, even it it’s babysitting, file a tax return and carry forward the RRSP contribution,” she said.

Contribution room in a tax free savings account does not begin until age 18, but parents could put money in their own TFSA, withdraw it tax-free and give it to the child.

These and other options are available to help parents and family members put aside money for children. Given the rising cost of raising a child, exploring all possibilities seems to make some sense.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

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