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IRA Financial Group Blog

Back To School Savings

4 Minute Read

Looking for ways to make back to school savings stick? As the global economy dwindles, the costs of living have been on a steady increase. Especially for parents faced with the burden of paying for a child’s education, it can be daunting. These costs can even be more significant when the kids are going back to school after a break.

But, the most challenging times to bear these costs are your golden years; when you are not actively committed to any job because of age. Yet, there are various saving plans that can aid parents to fund the costs of their kids’ education in their redundant years.

We shall consider the changes that occur with your kids returning to school and how they can affect you. You’ll see some savings that are designed to be your child’s lifeline to a decent education so won’t have a bit of worry when you retire.

What Changes Occur With Back-to-School Periods?

Over the years, we’ve noticed that parents end up spending hundreds to thousands of dollars around this period in the academic year. And, who knows, parents might dread these times and wish their kids stayed at home a bit longer.

So what’s with the back-to-school periods that sap so much cash out of parents’ pocket? And how can back to school savings help?

#1. Tuition Fees

This is one major implication of going back to school. If your kid is not on scholarship then you might not escape this cost. And, especially when kids are getting into new classes or new schools, tuition fees tend to be higher. Back to school savings and forethought can help you here.

#2. Books

Schoolbooks top the list as the most expensive item for parents of, especially secondary schoolchildren. The bad thing is, your ward cannot go to school without books, so it’s a necessity. And, this cost is significant this time because they might be getting an entirely new set of books.

#3. Extracurricular Activities

This is especially for parents whose kids are in primary school. Spending on gym gear/sports equipment has increased for both primary schools. And, kids might need to get new gym wears as the possibility that the old won is still decent is low.

#4. Clothing and Footware

School uniforms, stockings can be pricey, especially when schools mandate that they come from particular outlets. And, since the old ones might not leave your kids looking smart, you may have to make provision for it in your budget.

Then if you are changing your kids to another school, you are almost sure that this expense is part of the process.

#5. Transportation

Parents must have had a break from the large chunk that transportation cuts off their income, during the long break. And, with the recent state of things, whether your kid goes with the school bus or public vehicles, the cost may be slightly higher.

#6. Feeding

When kids are at home, you probably monitor the number of times they feed, streamlining it to what you can afford. But now, your ward might have to go to school with a launch pack for breaks. This can really inflate your feeding budget.

Imagine a family with four children and a monthly income threshold of $300. They might struggle to meet up with these expenses alongside other daily expenses. Now you can picture what it may look like when you have retired from work and still have to cater to these needs.

Saving For Retirement

The registered education savings plan (RESP) and the 529 plan are samples of education savings plans where you can save. Education savings plans were first created in 1986 along with Michigan Education Trust’s prepaid tuition plan.

These savings programs are primarily geared towards helping parents meet the financial education needs of their children.

The Registered Education Savings Plan (RESP)

This saving plan allows parents to contribute a certain amount annually for the future of their children’s education, and heir back to school savings. The contributions are channeled to some investments; bonds, stocks, mutual funds, guaranteed investment certificates (GICs), exchange-traded funds.

You can register for the RESP with financial institutions such as banks, mutual fund companies, and credit unions. Though not all offer RESPs.

One of the benefits of saving with RESP is that your contributions and grants grow tax-free.

The plan also attracts tax when:

  • It is taxed when a low-income student withdraws the money, but with a low rate
  • If a child chooses to discontinue the plan after high school
  • If the money accumulated is above the limit.

Only the “accumulated income”, money earned in the plan is taxable, as interest.

And this tax is dependent on the parent’s regular income tax level with an extra 20%, then the parents get back their contributions.

RESPs only last for 18 years and have a lifetime limit of $50,000 for each child.

529 Plan

Around 1996 Section 529 was added to the Internal Revenue Code, authorizing tax-free status for qualified tuition programs; 529 plans.

A 529 plan is an investment account where you can save for qualified education expenses for a specified beneficiary. This plan can serve for college, repayment of student loans, apprenticeship programs, and K-12 tuition. And, just like the RESP, it also comes with some tax benefits.

This plan is very similar to a Roth 401(k) or Roth IRA. It lets you invest your after-tax contributions in bonds, ETFs, mutual funds, etc, so that your investment can grow with the tax deferred. This means that you can withdraw your investment tax-free if the money serves the purpose of funding qualified higher education.

Also, federal income tax does not affect your contributions and you may even enjoy state tax benefits, but that is based on your residence. There are 30+ states that offer state income tax deductions and state tax credits for 529 plan contributions.

Currently, more than 100 different 529 plans exist, with at least one in each state where you can register. In the 529 plan, your risk tolerance and time horizon determine where your contribution is invested, and there are no annual contribution limits.

Savings Bottom Line

As you probably know “a stitch in time saves nine” emphasizes the importance of doing things, especially obligations, early enough. You most likely don’t want your kids denied a good education because you do not have a steady cash flow and so can’t afford one.

There are several other retirement plans like the RRSP and TSFE, but they may not be tailored to meet educational needs. These savings above are specifically designed with uncertainties in mind, to cater to your child’s education needs. As back to school savings, they can cover back to school and other educational costs.

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