Practical opportunities for education
McIntosh, L., private practice, dentistry
Both American and Canadian governments offer tax-advantaged methods of saving and investing for children’s or grandchildren’s higher education. The benefits of investing in a tax-advantaged environment are significant.
For American citizens, President Biden’s bold plans to support higher education are as complex as they are generous. We need to communicate with our bank about how the specifics of these programs apply to our situation. The advice will be useful and cost-free.
My experience is instructive.
When my son was born in 2003, I opened such an account for him. I began contributing $2500 per year to maximize the government grant of 20% that is available in Canada. Where else can you get a guaranteed 20% return on your investment? The US has similar offerings.
When my daughter was born two years later, I did the same for her. These contributions were split equally between an index mutual fund tracking the S&P 500 and one tracking the Toronto Stock Exchange Composite Index. Management expense ratios for each fund were 0.67% (a little higher than corresponding ETFs but not bad!).
I continued making these contributions until the maximum lifetime grant was reached a couple of years ago. With my son now finishing high school, I may start withdrawing the tax-advantaged funds soon, so last year I moved half of the total holdings into fixed-income funds with less volatility.
The numbers at this point are:
Total Deposits $75 020.00
Grants $14 400.00
Net $89 420.00
Value $204 215.05
Growth $114 795.05
The magic of compound interest is evident here. The growth exceeded the total contributions.
This investment required very little management time — only a few minutes each year to make the contributions. I was fortunate that the markets performed well during this time period.
It is interesting to note that my returns would have been higher had I followed Milan’s strategy of investing only in the S&P fund as opposed to a split between the S&P and TSX.
We are grateful to Dr. McIntosh for today’s post.
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