Education savings plans profitable but undervalued
RESPs a good way of funding child's education but can also be a savings plan for adults
Registered education savings plans (RESPs) have been around since the 1970s, and while they have seen significant growth across Canada in recent years, there's evidence they still don't get the respect they deserve from investors.
"Based on our experience, parents tend to underweight the value of RESPs," said Tina Fournier-Ouellet, a spokesperson for Quebec City-based Universitas Trust Funds, a non-profit scholarship provider that manages close to $800 million in assets.
An RESP is a way of setting aside money for someone's post-secondary education — that someone, although usually a child, can be another adult or even the person who sets up the RESP.
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The money is paid into an account that is administered by a so-called promoter, usually a financial institution but also specialized RESP administrators known as group scholarship plan dealers, such as Universitas. The promoter pays out the money to the beneficiary once he or she starts attending an eligible post-secondary institution. If the intended beneficiary doesn't end up pursuing higher education, the money is paid back to those who contributed to the RESP.
Almost anyone can be an RESP contributor — a parent, grandparent, other relative or friend — and federal and provincial governments can also make contributions through various grants. As of 2007, there is no annual contribution limit, but there is a lifetime cap on contributions of $50,000 per beneficiary.
Money inside an RESP can be invested in stocks, mutual funds, guaranteed income certificates and other investment vehicles — although there are differences depending on whether the RESP is a self-directed or a group plan (see sidebar below).
While contributions to an RESP cannot be deducted from your income like those to an RRSP, the capital gains that accrue within an RESP are sheltered from tax — as long as they are used by the beneficiary for post-secondary education.
RESP investment growing
The most recent government statistics show that investment in RESPs is growing.
Assets held in RESPs in Canada have been growing at double-digit rates in recent years and by the end of 2013, totalled $40.5 billion.
Self-directed or group RESP?
Aside from choosing whether you want to set up a family plan, which allows for more than one beneficiary, or a specified plan, which has only one beneficiary, who does not need to be related to the contributor, you'll also need to choose between a group RESP or a self-directed one. In 2011, group plans accounted for about 29 per cent of RESP assets.
Group plans pool contributions and share the earnings of participants. RESPs in group plans are administered together with those of beneficiaries born in the same year, who are expected to attend post-secondary programs at the same time.
Contributors must make deposits according to a set contribution schedule and are subject to stricter withdrawal rules and higher penalties than those with a self-directed RESP.
Group plans are generally more conservative in their investments, sticking to fixed income investments like bonds, but they also offer the potential for greater returns because they divide up the earnings and grants of participants who don't attend post-secondary programs among those who do.
Group plans are managed by a group scholarship trust or similar body and save you the bureaucratic hassle of setting up the account and having to decide how to investment the funds, but this also means that they generally charge higher fees than self-directed plans — where fees vary depending on which investment vehicles you choose.
Contributions rose to $3.9 billion in 2013, an increase of four per cent over the previous year. The average annual contribution that year was $1,474, only slightly above the average for 2012, which was $1,455.
Nevertheless, market research commissioned by Universitas suggests RRSPs and tax-free savings accounts are more than four times more popular than RESPs among the investors sampled.
That's based on 1,000 questionnaires completed during an online CROP survey conducted in Quebec in January.
That's no surprise, given that RESPs' primary purpose is of interest to a much smaller market segment: namely, those saving for their children's post-secondary education.
"Only seven per cent of respondents mentioned they are aware that the federal and provincial — in Quebec — governments also invest into a child's RESP," said Fournier-Ouellet. "Based on these results, we can conclude most parents don't know that RESPs may be profitable in the long term."
Many parents are unaware that the RESP can also be a savings plan for adults, with the capital invested returned in full to the subscriber, who can then choose to give this amount to the child as additional funds for school or transfer it to an RRSP and enjoy the benefits of both the RESP and RRSP.
Government grants can bulk up accounts
RESP accounts can also get a boost through the government's Canada Education Savings Grants. Under that program, the federal government contributes 20 per cent of the annual contribution you make to an RESP up to an annual maximum of $500 for each beneficiary ($1,000, if there is unused grant room from a previous year) and a lifetime limit of $7,200.
There are also additional grant amounts, which vary according to income. In 2014, a family with a net income of $87,907 or less would have been eligible for those.
Ottawa also provides total incentives of up to $2,000 for modest-income families through the Canada Learning Bond.
Depending on family income and which province is involved, government incentives "may represent up to $12,800 for a child's post-secondary education," Fournier-Ouellet told CBC News.
RESP contributions must be used within 35 years from when the plan was established. If the assets are not paid out to the beneficiary, the bank, insurance company, trust or other firm administering the RESP usually pays them to the subscriber at the end of the contract.
And even if the beneficiary doesn't attend a university, college or trade school, the contributors can still get back what they paid in – but not the government amounts — as well as the capital gains, although those will be subject to tax.
Or they can transfer the assets to an RRSP without tax penalty, if there's enough contribution room.