Ending a marriage invariably results in negative financial consequences for the family. The same two parents with the same incomes now have to support two households instead of one. Legal fees have diminished assets. Taxes may have been incurred if assets were sold to facilitate a settlement. Child-support-payment rules further complicate the picture. This legally redirected income is not taxed in the hands of the recipient, as is normally the case with income. Instead, because deductibility is denied, the non-custodial parent is forced to pay tax on income diverted to an ex-spouse. Income splitting normally reduces overall tax liability. This tax grab usually results in more money being paid in taxes and therefore less money being available to support the divided family.
All of these circumstances conspire to make it more difficult for divorced parents to provide financially for higher education for their children. This is unfortunate because those costs have been escalating dramatically in recent years. Most knowledgeable sources now estimate that to send today’s babies to university for four years will cost upwards of $100,000. This is no surprise to those of us who currently have children in university. Today, tuition, residence, meals, and books cost about $12,500 each year. The divorced parent faces greater challenges in saving this kind of money, and their children suffer accordingly.
One answer to this problem is the Registered Education Savings Plan (RESP). An RESP permits tax-deferred saving for a child’s education and even includes a 20% matching contribution up to $400 annually per child for up to 18 years. Separating parents might want to consider making contributions to a jointly-owned RESP a condition of their separation agreement or directing some support payments there. It’s a tax-effective savings vehicle, and the free money doesn’t hurt either.
Don Harrington (CA, CFP) is the chief financial officer with Global Maxfin Investments. He has practiced as an advisor but currently acts as CFO for a group of financial-services companies.