Cross-Border Education Savings: Smart Strategies for Canadian Grandparents Supporting U.S. Grandkids
Written by Carson Hamill CIM®, CRPC®, FCSI®, Associate Portfolio Manager and Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Portfolio Manager
Saving for your grandchildren’s education can be challenging enough, but add the complexities of cross-border finances, and it becomes a true balancing act. For Canadians with grandkids in the U.S., navigating education savings options involves understanding different tax systems, eligibility rules, and investment structures. Here’s a insightful look at the strategies available to make the most of these savings.
The Cross-Border Conundrum
Imagine grandparents in Canada eager to support their grandkids’ education in the U.S. The obvious choice might seem to be Canada’s Registered Education Savings Plan (RESP), a tax-advantaged account designed for education savings. However, RESPs are only available to Canadian residents, excluding their U.S.-based grandchildren from eligibility.
Turning to the U.S., the 529 Plan offers an appealing alternative, as it allows for tax-free growth and withdrawals when used for qualified educational expenses. However, Canadian contributors face hurdles, including potential U.S. gift tax implications and Canadian tax reporting requirements.
Other options, like the Uniform Transfers to Minors Account (UTMA), might seem promising, but these accounts give the beneficiary full control at age 18 or 21 (depending on the state). There’s no guarantee the funds will go toward education—they could just as easily fund hobbies, travel, or a gaming console spree.
So, what’s the best approach? Let’s explore two practical strategies.
Option 1: A Non-Registered Investment Account in Canada
One straightforward option is for Canadian grandparents to establish a non-registered investment account and grow the funds themselves.
- Pros:
- Retain full control over the account and its usage.
- Invest in growth-oriented assets, such as stocks, which are taxed more favorably in Canada than other income types.
- When the funds are needed, withdraw the money and gift it to their child or grandchild for education expenses.
- Cons:
- Income and capital gains within the account are taxable in the grandparents’ hands.
- Withdrawals may trigger additional taxes, potentially reducing the overall savings.
This approach keeps everything under the grandparents’ control but requires careful tax planning to ensure the funds are used effectively.
Option 2: Gifting Funds to an Adult Child for a 529 Plan
Another approach involves transferring the funds to their adult child, who can then open and manage a 529 Plan in the U.S.
- Pros:
- The 529 Plan grows tax-free in the U.S., with tax-free withdrawals for educational expenses.
- Contributions to the plan are straightforward for U.S. residents.
- The account holder (their adult child) ensures the funds are used for education.
- Cons:
- Relies on the adult child to manage the account responsibly.
- The gifting process may trigger tax implications under Canada’s gifting thresholds or the U.S.’s annual gift tax exclusion.
This strategy takes advantage of the 529 Plan’s benefits while transferring responsibility to the adult child, emphasizing the need for clear communication and trust.
Planning with a Purpose
Whether choosing to maintain control with a non-registered account or leveraging the benefits of a 529 Plan through their adult child, cross-border education savings require thoughtful planning and coordination. Understanding the tax implications and fostering open dialogue with family members are critical to ensuring the funds fulfill their intended purpose.
By tackling these challenges head-on, grandparents can provide meaningful support for their grandchildren’s educational dreams—proving that even the most complex financial hurdles can be overcome with careful planning and a bit of humor.
A Final Thought
Cross-border education savings might not be as simple as poutine versus cheeseburgers, but with the right strategy, you can navigate the complexities and ensure the next generation is set up for success. Reach out to a financial advisor with cross-border expertise to tailor a plan that works for your unique situation.
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers and with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.To schedule an introductory call, please click here.
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