If a child chooses not to go to post-secondary school - RESPs can stay intact for up to 35 years, although they’re usually targeted for use after a child finishes high school - the money put into the plan goes back to the adult and any government grants are returned. However, depending on the plan, you may also have to pay administrative fees and penalties. Any RESP interest earned that is returned to you also will be taxed, although that can be avoided if you transfer the funds to an RRSP if possible.
Ms. Radics says the cost of funding post-secondary school is something every family should discuss with their adviser when putting together a financial strategy. With four children between ages 4 and 25 and a second grandchild on the way, Ms. Radics has made RESPs a staple in her own family’s financial plan.
“I have to get to know the client, what’s important to them – some could be fretting about retirement, paying for insurance or even just meeting daily needs,” says Ms. Radics. “The big thing I want them to do is get all that government money [contributed toward RESPs] – if you can max it, that’s amazing.”
Ms. Radics gives this example of how contributing early and often can reap big benefits: A parent puts $50 a month into an individual or family RESP made up of mutual funds with a four per cent rate of return. Over 18 years, if the parental contribution is $10,800, that plan would be worth $15,718. Add in the government incentive (20 per cent matching up to $500 annual), and the plan value goes to $19,875.
When Ms. Lovell took out her first daughter’s RESP, she put her monthly federal Child Tax Benefits into the plan, which was projected to grow to $91,000 by the time her daughter turned 18, but with the economic downturn, that projection has dropped to about $65,000.
For that reason, one of the biggest decisions associated with having an RESP is where the money is invested. While group plan investments are decided by the plan manager, family and individual plans are often self-directed, meaning you have a choice in where your contributions are invested.
Investing strategies for both RESPs and retirement-targeting RRSPs are similar in that both allow for risk-taking earlier in the contribution process if they’re purchased well before they’re to be used. However, RESPs have a much shorter time horizon for investing, meaning less time to make up for any market volatility.
If you set up an RESP right after a child’s birth, you can afford to start out investing more aggressively – for instance, putting the bulk of the contributions into equities (stocks). As it gets closer to the child’s time to attend school, you can gradually move more of your money into mutual funds, bonds, and other lower-risk fixed-income assets.
Some financial institutions offer so-called target education funds. At RBC, for instance, they are made up of a portfolio of funds with an asset mix that evolves over time.
“You pick the target date you expect your child to go to university, and at the beginning you would invest more in equities to generate growth. But over time, the asset allocation is adjusted to make it more conservative and less risky,” says Mr. Round.
A brief summary of each type of RESP plan:
Individual: There is one beneficiary, and that child doesn’t have to be related to the person who takes out the RESP. The beneficiary can be older than age 21 when named. An individual plan allows you to invest the money on your own or with the help of a financial adviser.
Family: Allows one or more beneficiaries to be named, but they must be related to the subscriber. If one beneficiary decides not to pursue postsecondary school, other beneficiaries can still be allotted the money for their education. No regular monthly payments are required, and you can invest the money yourself or through a financial adviser.
Pooled (also called group) plans or scholarship trusts: The RESP manager pools the contributions and places them in investments earning a fixed rate of return. All earnings are shared equally among all beneficiaries in the plan, and when a child attends postsecondary school, the plan funds are paid out in the form of scholarships to pay for tuition or other education needs.
Questions to ask:
The Ontario Securities Commission recommends asking RESP providers these questions before signing anything:
· What are the fees involved and when must they be paid?
· Do you have a choice about when and how much you can contribute to the plan?
· What kinds of postsecondary programs qualify?
· When and how will you receive payments from the plan?
· What happens if the student doesn’t go to postsecondary school? Can you change your mind about having an RESP?