RESPs and the sin of missed opportunity are the topic of today's
If you're a parent, registered education savings plans are almost
as essential a financial planning tool as registered retirement
savings plans. And yet, a Statistics Canada study released this month
suggests nearly half of parents are unaware of RESPs.
What a waste. For RESP contributions of up to $2,000 a year, the
federal government's Canada Education Savings Grant (CESG) offers a
matching 20-per-cent payment. That's as much as $400 in free money
available to help send your kid to university or college. What part of
that doesn't sound good?
If you haven't got an
RESP for your child, here are your marching
orders. First, set up a plan at a bank or get a self-directed plan
through a financial planning firm, full-service brokerage or on-line
broker. Scholarship trusts are the least-attractive option because of
their fees, restrictive rules and sales practices that have drawn the
attention of the Ontario Securities Commission.
Part of the setup process is choosing between a family plan, where
you're typically saving for more than one child, and an individual
plan, which has a single beneficiary. Family plan beneficiaries must
be related to you by blood or adoption, whereas an individual plan can
be set up for any child.
Federal grant money aside, the big attraction of RESPs is they
allow investment dollars to grow tax-free until they're withdrawn and
taxed in the hands of the beneficiary student. As with RRSPs, it's
best to start early with an RESP to benefit from maximum compounding.
Lots of people have obviously let things slide in setting up RESPs,
so let's look at how to best make up for lost time.
The first thing to know is you can't backfill or carry forward
unused RESP contribution room like you can with an RRSP.
"The trick with RESPs is that you're held to the contribution limit
of $4,000 a year," said Jeff Young, a national financial planning
consultant with Royal Bank of Canada's RBC Investments.
But that doesn't mean you can't capitalize on CESG money you've
missed out on, Mr. Young said. You just have to be strategic about it.
Mr. Young uses the example of an RESP newly set up for an
eight-year-old born in 1996. This child would be able to claim grant
money going as far back as 1998, when the CESG was introduced.
To start soaking up that unused grant money, contribute the maximum
$4,000 to an RESP before the Dec. 31 deadline for this year. The first
$2,000 of that amount would generate the maximum $400 CESG payment for
2004, while the second $2,000 would generate an additional $400 CESG
payment for 1998. In 2005, you'd do the same thing over again and use
up unclaimed CESG money from 1999. Repeat annually and you'll have
used up all unclaimed grant funding with your 2009 contribution.
If you can't swing a $4,000 contribution to make up for unused
education savings grants, then contribute whatever you can in excess
of the $2,000 amount that will generate the maximum grant payment for
2004. Just remember, the slower you go in claiming that unused CESG,
the less you benefit from tax-free compounding over the life of the
This time pressure explains why Mr. Young suggests you set up an
RESP by year's end for a child who doesn't have one. If you wait until
2005, then you've added another year to the period of time it will
take to catch up on any unused grant funding.
Want some more motivation to get moving on an RESP? Lately, there's
been criticism of the RESP program on the grounds it benefits
better-off Canadians more than the poorer ones who truly need help to
send their children to university or college.
The federal government introduced a couple of measures on the
February budget aimed at helping lower-income get better access to
higher education. Still, you can't rule out changes to the CESG that
would make the program less generous after a certain income level. If
that happens, it will be a real sin not to have taken advantage of the
grant money while you could.