3 Ways To Save For Your Children's Education
If you’re a parent then you probably know that the cost of education is increasing every year, with some schools charging up to $20,000 a year. Now add the cost of uniforms, activities, and equipment, and you’ve got enough to buy a decent small car.
The key is to start a savings plan when they’re young. Most parents know the importance of starting early but are unsure how to start or what product or strategy to follow, particularly when there are tricky tax rules to be aware of. For example, if you put the investments in your own name, any interest earned is added to your taxable income and may reduce your Family Tax Benefits. On the other hand, if you put the investments in your child’s name, penalty tax rates apply once they have “unearned” income in excess of $420 per year.
So what do you do? Let’s look at a few possible options:
Investment bonds
One option you could use is called an “investment bond”. These products are essentially tax paid life policies where you get to choose the investment strategy. Your investment strategy can be in high growth investments, such as property, Australian and International shares, or more conservative investments such as term deposits. If they are held for at least ten years the proceeds are tax-free when cashed in. If you were to hold these investments under your own name, they would be taxed at your marginal tax rate.
One useful feature is that you can make a contribution of up to 125% of the previous year’s contribution and retain the tax-free status after ten years. Your income is reinvested and not included in the investor’s taxable income. If you cash it in before the ten year period, you can use the money on whatever you like but bear in mind that you’ll have to pay tax.
Friendly society education plans
These are similar to investment bonds. You only pay tax at the corporate tax rate (currently 30%) and the income is reinvested. Luckily, a special tax concession allows the friendly society to claim back the tax as long as the funds are used for educational purposes.
Even though the income must be for educational purposes there is more flexibility in making contributions and withdrawing funds than with an investment bond.
Mortgage offset account
If you have a mortgage, you can build up funds into a mortgage offset account or your redraw facility and reduce your interest costs at the same time. And easily withdraw from the offset account or redraw facility, when school fees become due.
This option is probably the more conservative one of the three because you’re putting funds back into your mortgage as opposed to investing in growth assets. Also, considering that interest rates are so low at the moment, your money isn’t really working that hard for you while it’s just sitting inside your mortgage.
Now, I know many parents get caught up in child-rearing and put things off by saying maybe next month or even next year. Sometimes we even tell ourselves it’s not the right time, we don’t earn enough or we need more information. And I get that it can be overwhelming…
But in order to be financially secure, you’ve got to prioritise and take action. This could mean you reach out to a financial planner for a free consultation, listen to a podcast, download an information booklet or speak to your accountant. Every small step towards financial success is a step in the right direction.
Tamara Gillman is a Certified Financial Planner® and the founder of True Journey Financial Planning. She is based in Brisbane and works online with people all over Australia to turn their dreams into reality. She provides advice in the areas of Debt Reduction, Super, Investing, Property, Personal Insurance, and Wealth Creation.
This article is general in nature and contains no financial advice. Always seek personal advice with a professional prior to investing.
Sources: www.ato.gov.au, “Individual Income Tax Rates – Children”; “Income of individuals under the age of 18”