Back to (future) school saving

Opinion

Back-to-school time is hectic and costly for many families with fees, new clothing, supplies and extracurricular activities.

Given the financial and time pressures, it’s easy to forget about future goals, such as retirement. It might be even easier for post-secondary education savings to slip through the budgetary cracks.

That seems to happen a lot in Manitoba, which leads the provinces with the lowest take-up of Registered Education Savings Plan use, at 40 per cent eligible children, federal government statistics reveal for 2024. The national average is about 53 per cent.

It’s understandable parents are on tight budgets. Recent MNP’s Consumer Debt Index findings show about two-thirds of Manitobans indicate feeling financial pressure, hoping for a decline in interest rates — which speaks to many families generally not having enough money to go around.

While finding money for the RESP sometimes feels insurmountable in the face of other, more pressing costs — from groceries to hockey and dance fees to hefty mortgage payments — it’s worth the extra effort because of the grant money that comes with contributions, says Sara Kinnear, director of tax and estate planning at IG Wealth Management in Winnipeg.

“A lot of it (low usage) has to do with a lack of knowledge about what’s available, and if you don’t know about RESPs’ benefits, you’re not going to use it.”

If RESPs are a mystery to you, here’s a quick summary:

● Contributions to a RESP attract the Canada Education Savings Grant, a 20 per cent top up to an annual maximum of $2,500 in contributions per child;

● That’s as much as $500 in grants per year with a lifetime maximum per child of $7,200 in grants;

● The money grows tax-sheltered and is taxed as income for the child when used for post-secondary costs, often resulting in little to no taxes paid;

● Low- and middle-income families are eligible for an additional 10 or 20 per cent in grants;

● Low-income families can also receive the Canada Learning Bond. Even if they have no money to contribute, the government gives them $500 per child upon opening a RESP with an additional $100 per year for 15 years.

“That’s $2,000 in bonds that could be available just by opening a plan, but you have to take the step of opening one,” Kinnear says, noting the earlier families start, the better.

After all, it takes time to receive the maximum bond and grant monies.

Kinnear notes not to worry if you’re a late starter. You can open a plan as late as the year your child turns 15 to receive some grants. And if you’ve opened a RESP and missed maximizing the full contributions annually, you can catch up in following years, contributing as much as $5,000 annually to receive $1,000 in grants, she says.

Of course, once you find money to contribute comes the matter of choosing an investment strategy.

The easiest course is to put the money into a high-interest savings account. After all, you’re already ahead after the first year with the 20 per cent grant.

But the sooner the RESP is started, the more risk you can take on with the investment strategy. That means you can put money to work in the stock market versus investing in low-risk, lower-return choices such as a savings account, bonds or guaranteed investment certificates (GICs).

Families can also look to a growing array of RESP investment products that do all the legwork for them. These invest in diversified portfolios that de-risk as the beneficiary (the child) gets closer to post-secondary.

Among the choices is the newly launched CIBC Education Portfolios. It offers a variety of portfolios with different allocations to stocks and bonds and different target dates. For example, the CIBC Target 2045 Education Portfolio — designed for children born 2025 to 2029 — starts out with money invested in 100 per cent stocks, and over time puts more capital into fixed income (bonds), which vary less in price.

“The client we’re appealing to is not the ones with $100,000 lying around … available to them on Day 1 when their child is born,” says Michael Keaveney, vice-president of managed solutions at CIBC Asset Management in Toronto.

The portfolios are essentially mutual funds containing over stock and bond mutual funds and a few exchange-traded funds (ETFs), and this structure allows investors to make regular, small contributions over time, he adds.

RBC, BMO and IG Wealth offer similar solutions for families, but access can be challenging depending on what financial institution you work with.

The advantage of these products is their ease of use. You don’t have to rebalance their portfolios over time. That’s done automatically, reducing risk as children approach enrolment.

Simplicity is often the top factor parents seek, says fee-for-service certified financial planner Jason Evans at Evans Retirement Planning in Winnipeg.

“Asset allocation ETFs are another great choice for both education and retirement savings,” he says.

These all-in-one portfolios that trade on stock exchanges also have much lower fee costs than speciality education portfolios: about 20 basis points versus annual fees that are at best four times higher.

Yet the drawbacks with all-one-ETFs is they do not de-risk over time. That’s left to you or your adviser. Yet it may not be as much work as it may appear.

“Gradually reducing risk starting about 10 years before post-secondary is reasonable,” Evans says, noting parents do not have much work to do other than contribute if they start early.

Within a year of enrolment, however, they must take care to have most of the money in bonds, GICs and savings.

It’s important not to let investment decisions delay opening an RESP. Just focus on contributing and then figure out investing if need be.

Then again, even that is a tall order for many parents — though maybe less so for grandparents, Kinnear suggests. “Maybe the parents find it financially tight, but the grandparents have a little extra wiggle room in their budget to put some money toward their grandkids’ education.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com