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Postsecondary education and RESPs: Why you should contribute

Posted on Wednesday February 19, 2020

Postsecondary education and RESPs: Why you should contribute

Your kids are your future! And when it comes to giving them every chance to succeed, these four letters should be on the tip of your tongue: RESP (registered education savings plan). Andi Basque, Wealth Management Advisor at UNI and Mutual Funds Advisor at Credential Asset Management Inc., explains how they work and why you should have one.

What is an RESP?

RESP or RRSP: the million dollar question! They look similar, but one letter can make a big difference. RESPs are for education; RRSPs are for retirement.

Andi Basque summarizes education savings as follows: “RESPs are registered investments that allow parents and grandparents to provide their children or grandchildren with financial assistance for postsecondary education. Contributions can be made starting when the child is born up to age 31 and the funds can be used to finance the child’s education up to age 35.”

The main feature of RESPs is that they get topped up each year with government grants and earn interest (called accumulated income). The savings generated can be used to pay for university studies or vocational training.

Government grants make all the difference

Mr. Basque (who is a parent and grandparent), thinks the government grants are what makes RESPs so attractive: “RESPs are very different from other investments because the yield comes from government grants in addition to your own contributions and the interest earned. Canada matches 20% of the subscriber’s annual contribution. So if you contribute $1,000 before interest, the government will contribute $200. Then an additional return is calculated on the total amount ($1,200 in this example).”

Do you have to contribute every year?

Not at all! Minimum contributions for this type of investment are a myth. When asked about this issue, Mr. Basque was reassuring:

“Many parents are wary of RESPs because they mistakenly believe that they have to contribute every year. That myth is widespread and often drives parents away. There is absolutely no requirement to contribute every year. Plus, the government grants are available retroactively. They can be easily recovered the following year. That happens all the time.”

Are RESPs meant for modest-income families too?

Absolutely! The idea of putting money aside when you’re on a tight budget may seem counterintuitive. But Mr. Basque thinks it’s a good idea for modest-income families to open RESPs.

“Thanks to the CLB (Canada Learning Bond), modest-income families may be eligible for an additional contribution on top of the standard 20%. The CLB pays $500 in the first year and $100 per year thereafter, even if no further contributions are made.” The measure is intended to encourage parents on a tight budget to save early, since time equals better returns on this type of investment.

What if my child decides not to attend university?

With RESPs, only the portion of savings accumulated via government grants and interest are earmarked exclusively for post-secondary education. That means that all your contributions come back to you when the funds are released, regardless of what your child decides to do.

“A lot of parents are reluctant to open RESPs because they don’t know what path their child will take, and that’s perfectly normal. They’re scared of losing their investment if it’s not used for education. When we explain that all their contributions come back to them, their misgivings vanish,” said Mr. Basque.

A tax-sheltered registered account

Since RESPs are part of a registered plan, interest accrued in them is sheltered from tax. Mr. Basque added that in the specific case of saving for education, the tax position is even more advantageous: “At the time of withdrawal, only the interest and grants—now converted into Education Assistance Payments (EAPs)—are taxable. Because that money will go to a student who is likely not working full time and has access to tuition tax credits, taxation is not an issue.”

Why start contributing as soon as your child is born?

Andi Basque, Wealth Management Advisor at UNI
Andi Basque, Wealth Management Advisor at UNI

It’s hard to imagine your child in university when they’re still in diapers and haven’t learned to talk! But these investments have a very long growth horizon, which is key according to Mr. Basque.

“Long-term investments make it easier to maximize the impact of your contributions for post-secondary education and optimize your returns because they are spread out over time.”

15-year simulation

In order to develop a solid savings plan, investors should work with their financial advisor to establish the length of their investment and performance. “Let’s imagine, for example, $2,500 in annual contributions over 15 years. $500 in government grants will be awarded each year for a total of $3,000. With 5% average interest, the total yield will be $67,600.”

Mr. Basque thinks RESPs can make a big difference: “Every day I meet parents who saved for their children’s education and helped them achieve their goals. Attending university can cost upwards of $10,000 per year. That tells you just how important these investments are.” The benefits aren’t solely financial, they’re also human, and they’re within your reach.

Mutual funds are offered through Credential Asset Management Inc. Mutual funds, other securities, and investment-related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered trademark of Aviso Wealth Inc. This article provides general information and should not be considered as personal financial advice, investment advice, or solicitation. The information contained within has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness.

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