Jim Main is set to put a lot of people through school. But it’s not his children who are the recipients. Mr. Main, a 94-year-old retired chartered accountant from Toronto, has set up 11 registered education savings funds (RESPs) for all of his grandchildren and great-grandchildren.
“It’s unfortunate we didn’t start earlier,” says Mr. Main, who didn’t fund RESPs for his children because the savings program did not yet exist, but set up and invested in a grandson’s RESP 15 years ago. “It has a profound effect.”
Mr. Main contributed the maximum amount of $2,500 each year to each child, investing in balanced funds. “The last time I looked at the return it was quite good,” he says. “I’m pleased – and I’m sure they are, too.”
Mr. Main is a part of a growing number of grandparents who are setting up – and managing – RESPs for their grandchildren, rather than contributing to RESPs set up by their children.
“There has been increased interest as grandparents have seen the rising cost of education,” says Dawn Tam, a regional financial planning consultant with Royal Bank of Canada in Vancouver. “It’s a very popular option.”
The reasons are myriad. Many feel their children are not in a financial position to contribute the maximum to the plans, a view supported by 2013 RBC research. According to Ms. Tam, 63 per cent of families with children 12 and under have RESPs, though 25 per cent contribute $200 or less to them a year.
Saddled with mortgages, car payments and facing increases in the cost of living, “young families have conflicting goals,” she says.
Ted Rechtshaffen, president and chief executive officer of TriDelta Financial in Toronto, concurs. “The kids may not be in a position to fund it. Generally speaking, 60-year-olds have more money than 40-year-olds.”
At a time when interest rates are low, many grandparents want to capitalize on the government grant, also known as the Canadian Education Savings Grant (CESG), which the federal government pays when RESP contributions are made.
If the yearly maximum of $2,500 a child is contributed, the government will add a $500 grant. That is an immediate 20-per-cent return on investment.
Mr. Rechtshaffen says unlike 40-year-olds who may be investing in RRSPs and TFSAs, retirees often have non-registered investment money that’s taxed on dividends, interest and capital gains. He suggests they talk to a financial planner about whether they foresee having an estate – or outliving their money.
If they believe there will money left over – which would be inherited by children and grandchildren anyway – he suggests RESPs as an investment. “Take that money that’s getting taxed for the 60-year-old and put it into an account that’s tax-sheltered and the government is giving you an instant 20-per-cent return on it,” he says. “That’s a better financial move.”
But while RESPs can yield big returns, grandparents have to be mindful of the plan’s limitations, as well as family dynamics, to avoid problems.
Mr. Rechtshaffen cautions that would-be RESP founders be wary of the maximum contribution limit of $50,000 and the government’s lifetime contribution amount of $7,200.
The amount the government contributes is also capped at $500 a year, regardless if an individual exceeds the $2,500 maximum. However, if an RESP is started years after a child is born, the RESP holder can invest money for each year since that child was born to qualify for the government contribution. This is because the CESG can be carried forward.
Another thing grandparents should watch for is overcontributing. Mr. Rechtshaffen warns that some families can become competitive about RESP contributions, with two sets of grandparents setting up RESPs for the same grandchildren. But if the beneficiaries are the same, the contribution room – and the CESG – are the same. Overcontributions are subject to a penalty of 1 per cent a month of the amount of the overcontribution in that month.
And if a child decides not to pursue postsecondary education, there is always the option of transferring the amount invested in the RESP to a sibling in a family RESP in which two or more children are named as beneficiaries. “The other one can suck up the money from the RESP,” says Mr. Rechtshaffen. However, if another child already has an RESP, the amount transferred must not exceed the maximum contribution amount.
Worst case, the grandparent, provided he or she is under age 71, can roll over the funds to an RRSP, minus the CESG contribution and the interest on it, says Ms. Tam. For those over 71, tax will have to be paid on any amounts in the RESP that are withdrawn.
As for the type of investments to select within an RESP, the sky is the limit, say experts, though many, like Mr. Main, opt for a balanced fund.
Mr. Rechtshaffen, however, suggests grandparents who are setting up a plan in the grandchild’s first year of life, consider the long time horizon when choosing between more aggressive and more conservative funds. He argues investors shouldn’t opt for, say, a 1-per-cent return at a time when they could be earning a much higher interest rate.
“If you’re investing early, there’s no need to be too conservative,” he says. “The plan is going to be around for 20 years.”
The grandparents’ primer
Grandparents setting up an RESP need to communicate their goals clearly, advises Ms. Tam. Failure to discuss exactly who will invest in the plan, how much will be contributed and who the plan will pass to could lead to family issues and unnecessary taxes, says Mr. Rechtstaffen. Here’s how to proceed:
1. Think long term.
Do you have investment money that’s being taxed – and could be parked in an RESP? Will you have a large estate? Do you plan on leaving a sizeable inheritance to your children and grandchildren? If the answer is yes, talk to a financial adviser about setting one up.
2. Determine who’s contributing.
If multiple grandparents and parents will be contributing, determine how much each party plans to pay in, says Mr. Rechtstaffen. Failure to do so will trigger a penalty of 1 per cent of the overpayment per month.
3. Name a successor.
Failing to designate a successor could mean the RESP will be considered a part of your estate after you die – and will be taxed accordingly. Some plans let you set up a successor, says Ms. Tam, or talk to your lawyer about including a successor/subscriber provision concerning the RESP in your will.
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