Alternative ways to fund education
Got quite a few of questions whether to contribute into RRSP or TFSA all the time (classic question), but then I am getting more questions on whether or not to contribute into RESP as well (another classic question), of course, there is no one answer fits all because every family has a different situation.
I have met a few families lately, they have either missed the opportunity to contribute into RESP, or they do not need to do a RESP plan (they will get free tuition, NICE!!), as much as I think getting free money from the government is the better way to go, that wouldn't work for these families.
So, here you go, alternative ways to fund education:
- set up a RRSP plan for your working children, they can do RRSP withdraw when they need the money for education, Life Learning Plan
- use an insurance plan as a saving strategy, you can almost get a guarantee return plus getting free insurance
This is how it can be done, taking the example from my clients:
This client has a 14 year old girl, looking to go into University in 4 years…. They have never done a RESP and they already missed that opportunity as the latest date to set up a RESP is the year when the child turns 13. So, I structured a $250K policy on the girl (the idea is that the child will need a policy for herself down the road anyway, the policy can be a nice wedding gift when she gets married).
From now onwards, the family will pay into the policy $310.42 every month, for 20 years, by the end of 20 years, the policy will be paid up and any extra money in the policy will be grown tax deferred.
This is what we can expect:
| time | account value | amount deposited | RoR |
| Year 4 | $12,108.00 | $14,900.00 | 81.26% |
| Year 9 | $25,658.00 | $33,525.00 | 76.53% |
| Year 15 | $42,337.00 | $55,875.00 | 75.77% |
| Year 20 | $61,452.00 | $74,500.00 | 82.49% |
If we need the money for tuition, we can have it withdraw under the kid's name (so that the tax is minimal). When we structured it, we had a withdraw going on every year from year 5 to year 9 (that is why you see a drop in RoR).
Another strategy I put together for a family who won't need a RESP because they will have free tuition (let's just pretend that the child will get all the scholarship to cover that). Bear in mind "education" plan can be any money needed when the time comes, but withdraw from RESP has to associate with a tuition paid at the college or university. Other than tuition, living cost like renting or boarding (average cost of residence/dormitory rooms: $3,000 - $7,500 CDN per school year), commuting or even eating out and stuff can cost a lot.
This family just had a new born and we do have quite some years we can prepare for the baby as she grows. I structured a policy based on him. This is a tiny $50K policy that I am putting together for him and all we are looking at is $100 a month for 20 years. The fix cos on the policy is hence, $24K:
| time | account value | amount deposited | RoR |
| Year 5 | $4,479.00 | $4,800.00 | 93.31% |
| Year 10 | $10,113.00 | $10,800.00 | 93.64% |
| Year 15 | $16,958.00 | $18,000.00 | 75.77% |
| Year 20 | $25,225.00 | $24,000.00 | 105.10% |
When the child is 15 years old (year 15), we will have already accumulated close to $17K in the policy, we can always access up to around 80% of the account value in the policy. If he keeps the money inside the policy, he will have free insurance for the rest of his life and then some.
Again, insurance in a netshell is a way to leave money to your family tax free and without going through probate or any complicated process. Please contact me for a tailor-made strategy on you and your family.
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