Planning for education costs
The rising cost of secondary schooling and university fees has made planning for this time in your children’s lives essential. But
education costs involve more than just school fees. Uniforms, books, excursions, tuition, extra curricular activities and and musical
instruments can all add up.
We can show you how to set up flexible and tax-effective ways so you can start saving now for your children’s future.
CASE STUDY:
John and Sarah - Late 30's
Child: Willow - 4 years
John earns $200K. He's in the top marginal tax rate of 47% including 2% medicare levy. Sarah earns $50K and is on a marginal tax rate of
34.5% including 2% medicare levy. They have once child, Willow, age 4. John and Sarah have received a windfall and would like to invest
it towards Willow's future.
John and Sarah have several options including:
- Leave the money in a bank account or term deposit. Any earnings are subject to tax at the parent's marginal rate.
-
Invest the money in a managed fund. Any earnings are subject to tax at the parent's marginal rate. A capitial gain or loss will arise
if the investment in the managed fund is disposed to transfer the proceeds to Willow, or if the units in the managed fund are transferred
to Willow at a later date.
-
They can set up a trust with themselves as trustees and Willow as the beneficary. However, any earnings will be treated as unearned
income for a child and likely be subject to up to 66% tax.
-
They can deposit the money into their mortgage offset account where it will effectively earn an after-tax return equal to their home loan
rate. However, unless they are highly disciplined in cordoning off this money (plus any notionally earned interest) there is a real risk
that over time this money may be absorbed into paying for other commitments (e.g. home renovations or purchase of a new home).
-
They can invest in an education fund, but this will mean that Willow could not use the money for non-education related expenses like a gap
year overseas or to put towards her first home.
-
They can invest in an investment bond, which is tax paid at 30% (subject to the 10 year and 125% rule), does not require any tax reporting
while the money stays invested and no capital gains tax are payable on switches or transfer of ownership.
Let's have a chat to plan out the best road forward for your family.
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