RESPs a vital tool for future education costs

Starting small and increasing contributions as you can will add up in the long run

  • Aug. 20, 2015 6:00 a.m.
Jeremy Stephen

Jeremy Stephen

Jennifer Blyth

Oak Bay News

According to one study, almost $385 million in Registered Education Savings Plan grants went unclaimed in B.C. last year. Just 53 per cent participated in the Canada Education Savings Grant and 37 per cent with the Canada Learning Bond.

So as students prepare for back to school, it’s also time for parents to create their own educational plan for the future.

“In my experience, parents are often overwhelmed with the other expenses and issues involved in raising a child. As such, many families defer the saving of money for their child’s education but never actually get around to doing so,” says Jeremy Stephen, a Wealth Advisor with The Hillyard Stephen Group at RBC Dominion Securities.

“My advice here would be that the best day to set up an RESP for your child or grandchild was yesterday.”

Confusion about how education savings programs work can also be a challenge, but most banks, brokerages and credit unions have experienced financial advisors who can customize a plan.

“Whether it is procrastination or misunderstanding, I would suggest that most Canadian families can’t afford not to utilize an RESP. The longer you wait, the less time your savings have to grow and compound. Ultimately, this will mean less money to use for education and the potential for larger student loans,” Stephen says.

RESPs allow people to contribute up to $2,500 per year (more if there are unused amounts from previous years) and receive a 20 per cent Canada Education Savings Grant from the Federal Government.

“On a full contribution, this amounts to $500 of annual funds (up to a $7,200 lifetime CESG maximum) that would otherwise not be available for future education expenses. The lifetime maximum contribution to any plan is $50,000,” Stephen says, noting that families in a lower tax bracket also have the added incentive of a potential $2,000 Canada Learning Bond.

Both contributed funds and grants/bonds can be invested in stocks, bonds, GICs, mutual funds and other professionally managed investments, depending on the type of institution you open the plan with; you’re not simply placing funds into a “savings” account.

“The growth on the contributed funds compounds on a tax-deferred basis and can often be withdrawn with very little tax during the lean income years that many students experience during school,” Stephen notes.

“Tax-deferred growth and a potentially low student tax rates means more funds for books, tuition, and living expenses.”

Plans can be contributed to for up to 31 years and can remain open for up to 36 years, which also makes RESPs a great vehicle for mature students as well as those looking to attend post-secondary directly out of high school, he says.

Even better, with the exception of family plans, “anyone can contribute to a plan for the benefit of a future student. This can include parents, grandparents or anyone else involved in the success of the child.”

Plans aren’t only for students destined for university, he points out, noting that “Qualifying Educational Programs” are flexible and can include programs as little as three weeks long.

Contributions that are not ultimately used by a child can be withdrawn by the original subscriber with some conditions.

The bottom line? “Don’t wait,” Stephen advises. “Start a monthly contribution plan with whatever you can afford and increase it later as cash flow permits. Most institutions will allow you to contribute as little as $25 per month.”