Many parents view the act of opening a savings account for long-term college savings as a good move. Once upon a time it was. However, times have changed and a regular savings account just doesn’t cut it anymore. Unfortunately for some parents, they come to this realization much later on and regret the many benefits they missed simply because they chose the wrong savings vehicle.
Saving for college is not like saving for a car or a vacation whereby the costs associated tend to remain more or less the same. College is different in that the fees are constantly rising year by year – and by significant margins too. In many countries the rate of college tuition increase has even surpassed that of inflation! For parents, this means a proper savings vehicle is required that will grow their money over time at a rate similar to that which college fees are increasing at. If not, it should at the very least, help them accumulate considerable funds.
Here are three of the best college savings plans that promise to yield more money than your traditional savings account.
Registered Education Savings Plans (RESPs) are investment vehicles initiated by the Canadian government to assist parents save for their children’s higher education. Unlike a savings account, parents registered with an RESP such as Knowledge First Financial have access to the education savings grant offered by the Canadian government. This grant is offered to parents in accordance with the amount they deposit into the RESP. The government contributes 20% for every dollar deposited, up to a maximum of $500 a year per child. Parents can receive the maximum grant per year by depositing $2,500 in their child’s account.
Parents with low incomes who need even more assistance saving for college can apply for additional Canadian Education Savings Grants (CESG) to further boost their savings. Upon approval, such parents can receive an extra 10 or 20% grant, depending on their situation, for each dollar they contribute. This is on top of the grant offered to all parents.
Low income families can also benefit from the Canada Learning Bond (CLB) as a result of using an RESP. If such parents have any children born past Jan 1st 2004 they can apply for a CLB and receive $500 when they first join an RESP and on the following years receive $100 continually for the duration they are deemed eligible.
Apart from these benefits, it’s worth pointing out that all the money contributed in an RESP is tax deferred. No taxes are imposed until the date of withdrawal provided the amount in the RESP is below $50,000.
2. Prepaid Tuition Plans
Prepaid tuition plans are great alternatives to RESPs. They appeal mostly to parents who are certain their children will attend in-state universities and colleges. Basically, prepaid tuition plans allow parents to save money for college by purchasing tuition credits at the prevailing market price to be used in future . These credits can be cashed in whenever the child is ready to attend college at no extra cost to the parent.
To illustrate this, if say, a parent bough tuition credit for $20,000 a year and the college tuition costs in an in-state university has risen to $30,000 a year in the period the child decides to attend college, their child would still be able to attend classes for the full year without any extra cost to the parent.
Other major benefits of prepaid tuition plans include the ability of the parent to change beneficiaries as they choose (although a 10% penalty is usually imposed) as well as receiving federal income tax exemptions. The value of the credits is also not affected by the stock market and inflation.
3. UTMA and UGMA accounts
Short for Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA), these are accounts with special benefits that parents can use to save for their children’s higher education. They were established as a simple way to enable minors to own properties and securities without the need for an attorney or a court appointed trustee.
UTMA and UGMA accounts can be used as savings vehicles to pool large funds mainly due to the tax benefits they are accorded. The first $1,000 is not taxed. The child’s tax rate is imposed on the second $1,000 while for the rest of the money an adult’s tax rate is levied. This mode of taxation is much better than that used in most savings vehicles and guarantees much more money long-term.