Essentially, using this strategy can be seen as using funds from your own plan to pay for your childrens education costs. Many people would ask "why even use this strategy" due to some of the drawbacks, but I thought I would still touch upon it as an option for investors.
Pros:
- account is in your (the parents) name, so you have all control of what goes in/out of it
- the funds grow tax sheltered
- if the child does not go to post-secondary education, there are no penalties or setbacks
- you (the parents) are in complete control of the money; in case there is a trust issue in regards to the child(ren)
- funds can easily be redeemed in case of any emergency prior to or during childs post-secondary schooling
- there is no limit to how much can be redeemed at one time
- you choose how much and when you contribute
- very flexible in what is invested within the TFSA
- no penalties for stopping contributions or redeeming funds before the child(ren) goes to school
Cons:
- there is no government grant - this can make up a big difference if the child DOES end up going to post-secondary schooling
- there is an annual maximum
- usually no guaranteed performance (if invested in stocks/mutual funds)
- no insurance protection on childs life
Cons:
- there is no government grant - this can make up a big difference if the child DOES end up going to post-secondary schooling
- there is an annual maximum
- usually no guaranteed performance (if invested in stocks/mutual funds)
- no insurance protection on childs life
- must be 18+ to open this account - can be challenging using this strategy if there are multiple children or a single-parent home because of the low limits
One key difference between this strategy and that of using an In-Trust Account (which I will discuss next), is that the funds in this account will always stay in the parents name, and will not automatically be put in the name of the child once he/she turns 18. This might be beneficial if there is an issue of trust with the child, in the case where the parents are not sure if the child will withdraw the funds and spend it on other things that they don't approve of.
The main reasons this strategy is not used as often as some of the others is because:
a) there no government grants; the up to $500/yr grant can make a huge difference in the amount of funds that are saved for post-secondary education
One key difference between this strategy and that of using an In-Trust Account (which I will discuss next), is that the funds in this account will always stay in the parents name, and will not automatically be put in the name of the child once he/she turns 18. This might be beneficial if there is an issue of trust with the child, in the case where the parents are not sure if the child will withdraw the funds and spend it on other things that they don't approve of.
The main reasons this strategy is not used as often as some of the others is because:
a) there no government grants; the up to $500/yr grant can make a huge difference in the amount of funds that are saved for post-secondary education
b) the max contribution limits allowed for TFSA
However, this strategy is used sometimes, especially in cases where it is complimenting one of the other strategies. Sometimes parents don't feel very comfortable with giving their children access to the funds, or might not be sure if their children will pursue post-secondary education.
The effects of maximum contribution room in the TFSA and the fact that there is no grant from the government might greatly reduce the amount that is accumulated for savings, so if you are using this strategy, please make sure you take the time to consider all the pros and cons. Also, if using this strategy, it is recommended that it be used as a compliment to one of the other strategies as well.
However, this strategy is used sometimes, especially in cases where it is complimenting one of the other strategies. Sometimes parents don't feel very comfortable with giving their children access to the funds, or might not be sure if their children will pursue post-secondary education.
The effects of maximum contribution room in the TFSA and the fact that there is no grant from the government might greatly reduce the amount that is accumulated for savings, so if you are using this strategy, please make sure you take the time to consider all the pros and cons. Also, if using this strategy, it is recommended that it be used as a compliment to one of the other strategies as well.
One important thing to note. This same strategy can also be done using an Open (non-registered) Plan by the parents. It would only make sense to do this once the TFSA has been maxed out, as there is preferential tax treatment on the TFSA.
Please consult your financial advisor before making any sort of decisions. I hope you have learned something here and please do not hesitate to contact me if you require further information.
Please consult your financial advisor before making any sort of decisions. I hope you have learned something here and please do not hesitate to contact me if you require further information.
No comments:
Post a Comment