by Scott Pape - October 10th 2011
THE number one goal of most families is to provide a good education for their kids.
And the cost of sending your kids to most private schools almost requires a full-time wage. That’s why it’s important to start thinking about it well before they hit high school.
Not that the Government is helping matters. Last year in an effort to crack down on wealthy parents using their kids as a tax dodge, they reduced the amount of unearned income a kid can receive tax-free from $3,333 to $416 – after that they get whacked with a 66 per cent tax on income up to $1307 (and 45 per cent for every dollar thereafter).
So whatever you do, don’t save for their education in their own name.
Instead, think about opening up an education bond. These can effectively be opened in a child’s name, and the issuer pays the 30 per cent tax rate on the earnings within these bonds (so it doesn’t need to be put on your tax return) and after 10 years they’re free of capital gains tax.
The Australian Scholarships Group is the largest provider of education-based investments in this country, and in my humble opinion absolutely the worst piggy bank to be placing your savings.
Why?
Ridiculously high fees, expensive and irrelevant insurance policies, and an antiquated system that financially penalizes your kid if they choose not to go on to higher education – a trap that many well meaning parents don’t realize until it’s too late.
A better bet is looking an education bond by Lifeplan Funds management. There’s nothing like a monthly savings goal called ‘kids education’ to create an emotional connection — that’s one bill you will pay, no matter what. Remember though, in order to get the benefit for high school, you’ll need to start very early, and fund it well.
Tread Your Own Path!
Photo: http://www.flickr.com/photos/calamity_photography/4803854294/
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3 comments
it can be complicated to calculate (though a computer can do it for you) and requires discipline, but I would recommend simply saving in your home’s offset account.
a good program would enable you to look at your loan and offset account, and ‘split’ it into two or more accounts. the trick is to make it so the interest saved by having the money in there, acts as interest earned on the ‘separate’ kids saving account.
this way you could have it so your loan looks as it would had no extra money been put in there, and the ‘separate’ split accounts would appear to be earning interest at the rate of your homeloan, tax free.
I think a tool like this – that would be simple to make – would be extremely powerful for any family with a mortgage.
because money in an offset account (and feel free to call me out on this) is THE BEST very low risk ‘investment’ you can make.
not to mention it means you only have to worry about one physical financial product. not multiple accounts with multiple institutions ect.
we have invested for our son’s education and are now at year 7. The balance is just tracking our deposits at the moment and has often dipped below our contributions as it is a share based investment. It has been a very disappointng investment and I would not recommend this at all. We would have been much better off making the same commitment and locking the funds away in term deposits. No fees, no hassles and no helplessness at watching your son’s education money dissipating
Hi Scott,
I checked out the performance of the Lifeplan Funds education bond and it’s pretty poor. Most options’ 3 year performance is much much lower than a term deposit or even cash rate. I know markets are cyclical etc but will the tax advantages of these funds make them comparable to term deposits over the long term? I’m not sure how to work this out….
Cheers,
CK