The ins and outs of RESPs
By Madhavi Acharya-Tom Yew
We're saving about $6,500 each year for our three daughters' post-secondary education. It's a sacrifice but we think it's well worth it.
We save in Registered Education Savings Plans (RESPs) so we get the government's Canada Education Savings Grant (CESG). The grant adds 20 per cent to the first $2,500 of annual RESP contributions to a maximum of $500 per year and $7,200 over the life of the RESP.
RESPs are the best option when saving for post-secondary education, because you get government help, but you can also use a Tax Free Savings Account which allows you to shelter up to $5,000 per year. You can withdraw the money at any time from a TFSA, but cannot replace it until the following year. Because it’s not an RESP, you won’t be eligible to receive the government grant.
RESPs allow you to save up to $50,000 per child and in addition to the grant, low-income families may also receive the Canada Learning Bond. This is a grant of $500 initially plus $100 per year up to age 15, where the primary caregiver is eligible to receive the National Child Benefit Supplement.
RESPs offer two basic choices. You can do it yourself through a self-directed RESP at a bank, brokerage or other financial institution, or register for a group RESP through providers such as Canadian Scholarship Trust Foundation, Heritage Educational Foundation or USC Education Savings Plans. It’s crucial to understand the difference. Group RESPs tend to invest contributions in government bonds and they’re pooled with contributions from other subscribers with children of the same age. The pool is divided at maturity among the remaining members.
Group RESPs are a commitment to a specific contribution schedule for the next 17 years. Some parents like the discipline with these plans, but the downside is that if you have to stop making contributions for any reason, you may lose some of what you’ve already socked away. If you close the plan, you will not be able to get all your money back.
Group RESPs have been criticized by regulators for not providing more disclosure about fees and marketing costs. Some customers are surprised by the enrolment fees which can run as much as $1,000. For the first few years, most of your contribution may be going to the enrolment fee rather than any investments.
The RESP you open at the bank offers more flexibility because you decide how much to contribute, and when. You can also choose the type of investments, from GICs and bonds to mutual funds.
RESPs have become more flexible. Your child has until the age of 35 to complete his or her education and post-secondary doesn’t have to be college or university. It can also include vocational or technical schools. And if your child does not attend post-secondary, the grant money can be shared with a sibling if they have grant room available, or it has to be returned to the government. Your investment can be rolled into your RRSP, provided that you have the contribution room.
Before you decide on an RESP plan, ask these questions.
- What fees will I pay?
- Do I decide when I make contributions, and how much I contribute?
- When and how does the student receive payments from the plan?
- What happens if the student decides not to go on to post-secondary? What happens if he or she doesn’t complete the program?
- What happens if I sign up for the plan, but then change my mind?
A recent survey by ABC Life Literacy Canada, a non-profit group, found that while 93 per cent of Canadian parents say that post-secondary education is important, and 83 per cent expected that their children will continue with their education after high-school, only 46 per cent of parents are actually saving for their education.
“We see the value of post-secondary education but we’re not investing in it,” said Mack Rogers, program manager of community literacy and learners.
The survey found that nearly three-in-10 will make their child responsible for their own post-secondary education costs.
Rogers believes that part of the reason for the disconnect is that people see a price tag of $50,000 or $60,000 for post-secondary education and say I’m never going to get there.