Why More Canadians Should Invest in an RESP

Few Canadians save for their children’s education via a registered education savings plan. Here’s how to get past some of the barriers to entry.

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When Eva Facciolo, a broadcast journalist, and her husband Agostino, a sales professional, got married five years ago, they agreed they’d have kids, and that they’d pay for their education. So now that the Whitby, Ontario, couple have two toddlers, they put money aside every month in a registered education savings plan (RESP). But they still worry about having enough. “Who knows what school will cost when my girls go?” she says. “I hope the RESP covers the majority.”

Canadians who ignore RESPs may be missing out – on growing their children’s education dollars and on government grants that can add even more to school-related savings.

At least the Facciolos are using an RESP. According to Statistics Canada, about half of all Canadian families have opened one, which is lower than the 65 percent of Canadians who have contributed to either a registered retirement savings plan (RRSPs) or a tax-free savings account (TFSAs).

Many put off RESPs because they feel they need to save for retirement first. “People put their money where their focus is, and most people focus on saving for retirement versus saving for education,” says Grant Smith, a partner at Vancouver-based Clearline Chartered Accountants.

However, Canadians who ignore RESPs may be missing out – on growing their children’s education dollars and on government grants that can add even more to school-related savings. Those who contribute to an RESP receive a Canada Education Savings Grant*, an automatic 20 percent contribution made by the government into your account on contributions of up to $2,500 per year. That’s $500 in free money, up to a lifetime maximum of $7,200. “So, yes – free money does exist,” says Smith.

Make time to open one

While that should be enticing enough to open an RESP, people still find it difficult to do. The biggest drawback? Busy parents think they don’t have enough time to set up an RESP and fill out the paperwork. “And that’s one of the biggest barriers,” says Sara Kinnear, Director of Tax & Estate Planning at IG Wealth Management.

Facciolo admits that it was rather burdensome to open the RESP because of the forms. She filled out a five-page document that needed a range of information from citizenship to employer’s information. But if you can set aside a little time you can get through it. Fortunately, once an RESP is set up, it requires minimal administrative demands until a student starts using them.

You won’t lose your money

Another reason why people don’t use them is because they’re unsure of whether their child will use the funds or not, says Smith. It may seem like more of a sure bet to save for retirement and then just pay for postsecondary education later.

Fortunately, any money saved won’t be wasted. An RESP can stay open for 36 years, in case the RESP beneficiary (the person for whom it was established) decides to take a few years off and then go to school. In most cases, you can also earmark any unused money to one of the RESP beneficiary’s siblings, or transfer the RESP income (growth) to yourself or your RRSP, or under certain circumstances, a registered disability savings plan.

If you do transfer the RESP income to yourself, it will be taxable income to you and subject to an additional penalty tax. If you transfer the RESP income into your RRSP, you will have to give back the government grants and the income you transferred will become taxable to you when you eventually withdraw it from your RRSP. However, you won’t have to pay any tax or penalties when you withdraw the RESP contributions, says Kinnear.

Make automatic payments

Since RRSPs and TFSAs are top of mind for many households it can be challenging to allocate money to an RESP.

Facciolo has found that the easiest way to contribute to her children’s RESPs is via automatic monthly deposits. Money comes right off her paycheque and goes into the account.

By contributing about $209 a month you’ll reach the yearly goal of $2,500, which ensures a government match of $500, says Smith.

Like any investment, RESPs grow best when they’re under the care of a financial professional. Meanwhile, revisit your education savings frequently to make sure you’re putting away enough, that all the grants are coming in as expected and that you’re invested in the right products.

And when that first college or university tuition bill comes in, everyone in the household will be grateful you bucked the national trend and put your dollars into an RESP. “Simply knowing we have the RESPs helps us sleep better at night,” says Facciolo.
 

* The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.

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