Too late for an RESP? Experts say growth perks are still worth it

Earlier is always better, but even a late start in RESPs has benefits.

“I think they’re a very valuable tool, and the biggest pro of all is that by using them, you get free money,” said Matthew Kempton, portfolio manager at Verecan Capital Management in Halifax.

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“The government’s going to give you a grant — a percentage of your contribution — and there’s even more free money that would come along if you’re a lower-earning household.”

A Registered Education Savings Plan is a saving tool for education after high school, which includes trade schools and apprenticeship programs, not just college or university. In addition to tuition, the funds can be used for rent, transportation and other expenses.

The age of 15 for the child is a cut-off point for receiving those government grants if certain minimum contributions haven’t been met yet, Kempton said. But RESPs still have value without the matching grants, he added.

“You’re still in a vehicle where dollars are growing tax-free until they’re withdrawn, and there’s value in that,” Kempton said.

Low-income families are eligible for additional contributions from the government through the Canada Learning Bond.

Even if you open an RESP later on in your child’s life, he noted contributions can be made for up to 31 years from when it was opened.

“At that point it’s become maybe more of a tax-planning tool versus a ‘free money’-type vehicle.”

If a child doesn’t pursue further education or training after high school, the money can be used in other ways, said Kalee Boisvert, a Calgary-based financial and investment advisor for Raymond James.

“If they choose not to use it for school, you can keep them open for up to 35 years,” she said.

“It’s growing and being invested; there’s no taxes on any growth and dividends and interest within that RESP” until the money is withdrawn.

The government grant and investment gains portion of withdrawals are taxable, but since it is taxed in the hands of students, who are typically low earners at that stage in their life, there’s usually little to no tax owed.

If the child wants a different career path, such as starting their own business, they can pull that money out, Boisvert said. Government grants would have to be returned to the government if not used for school — but only the original amount. Any growth on the grant is yours.

“What’s interesting about that is while you’ve had that government grant portion over the years and have been investing it, you’ve likely made money on that grant portion,” Boisvert said.

“So you only have to return the actual grant amount that you received. You don’t have to return any additional growth that was attained from that money — which is nice.”

While that growth doesn’t have to be returned, it is taxable, and can receive an additional tax penalty — but it can also be sheltered from tax by transferring it into an RRSP for the parent, if they have the contribution room, she added. Consult with a financial professional for limits and other details.

Savvy investors can see massive growth. In one extreme case, Boisvert said a woman had an RESP for her child that had grown to $400,000. The woman had started early, invested in technology stocks, and the investments took off.

Despite the taxes that will be owed on that amount of money being withdrawn, “that’s going to more than pay for school,” Boisvert said.

“Her daughter’s probably going to get a vehicle out of it as well to be able to drive to school.”

Boisvert wants parents to consider the investment piece and take bigger swings. Since the savings are for their children, they are emotional and tend to be conservative with investing.

“But remember, early on — we have a long-term timeframe,” Boisvert said.

“How do we invest when you have a long-term timeframe? We want growth here. And as that time frame shortens, we want to start scaling back on the risk.”

Embark, an education savings and RESP company, manages this on behalf of parents with a “glide path” investment strategy, calling it the Embark Student Plan.

“The younger your child is, the more we invest in equities,” said Andrew Lo, CEO of Embark.

“As your child grows older and approaches needing the money to go to post secondary, we automatically rebalance that into a conservative investment so there’s certainty in terms of the amount of money you have ready for tuition and room and board and so on.”

You can bring other family members into your RESP goals — cash gifts from grandparents and other relatives can go into these savings, and Lo pointed out that Embark facilitates that with a gifting link.

Parents should also introduce children to their RESP in middle school — it gives them confidence, Lo said.

“Tell them, ‘We’re going to be ready to help you when you’re ready to select your career, your post-secondary courses, and finances will not hinder you from achieving your goals and your dreams,’” Lo said.

“That will give the kids a sense that their parents really believe in them, and will get them to start thinking about what kind of careers they want to have.”

Read more:

• Saskatchewan schools face growing pressures as classes resume
• How to avoid these common RESP withdrawal mistakes
• Sask. government announces new school literacy initiatives for September