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Be smart – save for your children’s education

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Education is getting more expensive and entry to the best courses, more competitive. Some private schools are charging fees of up to $18,000 a year, excluding uniforms, excursions and after school activity expenses. Also, the cost of earning a degree, particularly in the popular disciplines like law, IT and medicine is also rising.

The rising cost of education means that you need to put a sound savings plan in place when your children are young, and stick to it. However, many parents 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 income is added to your taxable income and may reduce any Family Tax Benefits you receive. If you put the investments in your child’s name, penalty tax-rates apply once they have unearned income over $1,334 a year.

So, what do you do to save for your children’s education? Here are a number of options to consider.

Managed investments

Buying units in a managed investment gives individual investors the buying power to access markets not normally available to retail investors – like international equities, large-scale commercial property developments and global technology infrastructure. With as little as $1,500, you can gain exposure to a diversified range of assets (including shares, property, fixed interest and cash) managed by experts.

Mortgage offset account

If you have a mortgage, you can build up funds in a mortgage offset account. By reducing your interest costs, this strategy can return around 8% pa after tax. You can draw on the offset account when school fees are due.

Gearing into Australian shares

Personally borrowing to invest can be a tax effective strategy because you can claim deductions for the interest cost and use imputation credits to reduce the tax payable. When you cash the investment in to pay school fees only, 50% of the capital gains are taxable if the investment has been held for at least 12 months. However, borrowing to invest does involve some risks, which should be discussed with your financial planner.

Investment bonds

Another option is an “investment bond”. These products sometimes have other names, but are essentially only tax-paid after 10-year life policies where you choose the investment strategy. If they are held for at least 10 years, the proceeds can be tax paid when cashed in. This means that you are not taxed on these proceeds because the life company has already paid tax. The life office pays tax at a flat rate of 30% though the actual rate of tax may be much lower because of the deductions and imputation credits that the fund can claim.

One useful feature is that the investor can make a contribution of up to 125% of the previous year’s contribution and retain the tax-paid status after 10years. Income is reinvested and not included in the investor’s taxable income. If you cash them in before 10 years, there may be tax payable but you can use the proceeds for any purpose – not just for education expenses.

Contact your financial planner

No one solution suits everyone, so talk to your financial planner to see what options may best suit you and your circumstances.

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