Getting educated about RESPs

Opinion

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This article was published 13/09/2014 (4040 days ago), so information in it may no longer be current.

It’s the best savings deal going, hands-down. But many Canadians who are eligible to use it, don’t.

The registered education savings plan — or RESP — has been around since 1998, luring us with grants to save for our children’s and grandchildren’s post-secondary education. Contributions grow untaxed while attracting a 20 per cent top-up grant from the federal government.

It’s a sweet deal — even better than the benefits of TFSAs and RRSPs.

But 2012 data from Statistics Canada tell us the participation rate by eligible families is only about 45 per cent across the country.

In Manitoba, it’s even lower. Despite our reputation for being efficient with a dollar, only about one-third of Manitoba families eligible for RESP grant money take advantage of it.

Whether it’s Manitoba or elsewhere, it’s an all-too-familiar scenario for Brett Strano, an investment adviser with Edward Jones.

“A lot of the time, it comes to people not getting around to using one; parents keep putting it off and putting it off until all of a sudden the kids are in high school, and there may not be anything saved, so their kids have to take out loans,” says Strano, whose two kids have RESPs.

“This speaks to the fact that more Canadians need to take a closer look, because RESPs are a wonderful tool to supplement education costs.”

Of course, some parents don’t have the means to save for their kids’ future education. Heck, saving for your own future is tough enough.

Still, low-income families can qualify for additional government grants, and there is no minimum contribution to an RESP. You could contribute $10 a month, for example.

And every little bit helps, though judging by the rising costs of school — the more, the better.

For the last three decades, tuition costs have outpaced annual inflation, a spread that’s likely to get wider as cash-strapped governments tighten their belts.

So if you have some vague aspiration your child may become a plumber or scientist, or anything that requires higher education, it’s best to start saving ASAP, says Mike Holman, who has RESPs for his children.

And if anyone should know about RESPs advantages, it’s this guy.

Having authored one of the few books exclusively on RESPs — if not the only book — he is the leading expert on how to use them to maximum benefit, despite not even being a financial professional.

“If you make an effort to be an expert in an area that nobody else wants to be an expert in, it’s not hard rise to the top,” says the author of The RESP Book: The Simple Guide to Registered Education Savings Plans.

“Not that many people find them interesting — but I do, oddly enough.”

And that dearth of knowledge is part of the problem. Not enough people, including financial professionals, are well-versed in RESPs even though they are the most complicated of all registered savings accounts.

First, parents have to figure out how to invest the money. While that’s an issue for saving in general, RESPs have that additional wrinkle of a shortened timeline compared with retirement. In many cases, you only have only 18 years to save. So it’s helpful to have a little knowledge about how to choose the right investments from the get-go and how to rebalance those growing assets as your child comes closer to attending post-secondary school.

“Some people really feel intimidated by the amount of choice,” Holman says.

And there’s a lot to choose from, because any investment eligible for an RRSP is also eligible for an RESP — and that’s just about everything: from mutual funds and GICs to stock, bonds and ETFs.

Even more complicated is figuring out how to use RESP money once the kids are in post-secondary.

It’s so complicated, in fact, Holman recently published another RESP treatise, an ebook with a title leaving little to the imagination: How to Withdraw From Your RESP Account Whether Your Child Goes to School or Not.

Holman says what causes the most confusion is the fact not all withdrawals are treated equally in the eyes of the taxman. For instance, withdrawals of contributions are tax-free, and that money doesn’t even have to be used for the kids’ education. The parents could, in theory, blow it on winter trips to Mexico.

But the grant money and any returns from both contributions and grants are taxable — though generally in the hands of the student, so the tax bill should be relatively small.

Still, parents and students run the risk of paying more in taxes than they should if they go about the withdrawals the wrong way, he says.

These issues aside, a lot of people hold misconceptions about saving for post-secondary education that prevent them from making the most of RESPs, says Kyle Prevost, who graduated debt-free thanks in part to money his parents set aside in an RESP.

It also helped that Prevost — a teacher who now lives in Birtle — was a resourceful student when it came to paying for school.

In fact, he became so adept at stretching dollars in college, he co-authored More Money for Beer and Textbooks, a book he self-published with his ex-university libation wingman Justin Bouchard.

“We decided we had a unique perspective as two young people who graduated with no debt even though we both lived away from home,” Prevost says. “We didn’t have to live like monks. We definitely had our share of nights at the campus bar.”

To help pay their way, they used an assortment of money-augmenting strategies, from finding a lucrative summer job as a student border officer to applying for scholarships others overlooked.

Although the duo needed more than RESPs to get through five years of university, Prevost is unequivocal about their value.

“You’ll never find another savings vehicle where you will get an immediate, guaranteed 20 per cent return on your money,” he says, adding he and his fiancée plan to start one as soon as they have a child.

In his opinion, it’s just so important to get an early head start because getting the full benefit of an RESP — the $7,200 lifetime limit in grant money — takes about 14 years (though you can double up to make up for missed contributions).

And while some parents argue their children should pay for university themselves, like they did, Prevost says this argument doesn’t hold much beer in his mug.

“Paying your tuition with just a summer job is tougher than ever taking into consideration the current job market and the cost of education versus the minimum wage.”

The fact is tuition costs a lot more than it once did.

“If you look back to 1984 and increase the price of a jug of milk at the same pace as tuition, a jug of milk would cost $10 to $12 today,” he says, citing a statistic he read in the Globe and Mail.

“So to say to your kids that ‘I did it on my own, so you should be able to do the same thing,’ that’s not really a fair assessment anymore.”