As yet another school year begins during the COVID-19 pandemic, families who are either making contributions to or withdrawing from their registered education savings plans (RESPs) may not be facing the same level of uncertainty as they did a year ago. Nevertheless, some financial advisors say this second year of the pandemic has resulted in a new set of questions from RESP subscribers.
These advisors say that there’s an ideal opportunity now to provide reassurance to clients with children either entering their university years or those earlier in the contribution process on their RESP strategies.
Here are three specific areas that are causes of uncertainty, which advisors and their clients should discuss:
Catching up on contributions
For many families, loss of income and employment interruptions brought discussions about cash flow to the fore earlier in the pandemic. One temporary cutback for some individuals with younger children may have been monthly RESP contributions, says Janet Gray, a certified financial planner and money coach with Money Coaches Canada Inc. in Ottawa.
In late 2020, a survey from Knowledge First Financial found that for more than four in 10 Canadian parents, COVID-19 has had a negative impact on their ability to save for their child’s post-secondary education.
Ms. Gray says that RESP contributions were “one of the things [many clients] could set aside and pick up or double up on later.” So, people who were trying to make annual contributions of $2,500 a year for each child to maximize the Canada Education Savings Grant (CESG) said, “That $200 can be better used elsewhere [at the moment].” She says that many who made that decision planned to make up the difference the following year.
Indeed, Owen Winkelmolen, founder and fee-for-service financial planner at PlanEasy Inc. in London, Ont., says many clients who needed to pause contributions to their children’s RESP in 2020 are now discussing the potential of catching up.
“It’s not the end of the world if somebody missed an RESP contribution in the previous year due to cash flow issues [or] budgeting,” he says. “There are a few rules around catch-up contributions. But for the most part, that’s an opportunity – and we’ve definitely seen that.”
Specifically, individuals can carry forward the unused CESG of a maximum of $500 a year on contributions of $2,500 for use in future years. Until the end of the year in which a child turns 17, clients can catch up on those contributions one year at a time. So, a contribution of $5,000 per child this year, for example, would receive a CESG of $1,000, maximizing the government grant for both this year and last.
Another side of catch-up contributions is that clients are now also choosing to redeploy excess cash flow realized during the pandemic into RESPs to take advantage of missed contributions from previous years, says Robyn Thompson, president and certified financial planner at Castlemark Wealth Management Inc. in Toronto.
“Clients who have two or three children and have not necessarily maximized their RESP contribution room [are looking] to maximize their grants. So, a lot of catch-ups are happening right now,” she says.
Concerns about a stock market correction
With stock markets continually hitting record highs, RESP subscribers with children either in university or approaching their post-secondary years are getting worried about the impact of a potential pullback, Ms. Thompson says.
Specifically, what would it look like from a portfolio perspective if they need to take money out of their RESPs and markets undergo a correction?
Given the rapid stock market recovery and subsequent growth experienced in 2020 following the COVID-19-led crash that took place early that year, some clients have developed a false sense of security, says Mr. Winkelmolen, who often sees families whose asset allocation doesn’t quite match their investment horizon.
“A big recommendation [we always make] is, ‘Don’t get too greedy if you had some good returns,’” he says. “It’s always important to have that plan in place and to appreciate that when the kids are starting to get to their middle teenage years, that those withdrawals are coming up quite soon.”
Indeed, Ms. Thompson says that’s where an emphasis on the importance of clients acting within the confines of their financial plan is key.
“That’s why you’ve done the work and the plans that you have put together, they’re built to be able to withstand short-term volatility,” she says.
The goal for those with children about to head to university is to ensure they have enough cash flow on the sidelines to be able to fund at least the first couple years of education so that they’re not faced with a situation in which they’re withdrawing money when portfolio levels are depressed, Ms. Thompson says.
For many families, that will involve reducing portfolio risk appropriately during the high school years, while continuing to maximize long-term potential returns for younger siblings, she says.
Managing a year off
As uncertainty around in-person or virtual studies persists, Mr. Winkelmolen has noticed an uptick in students choosing to take a gap year in 2021-22, which has sparked discussion around RESP drawdowns and the plan’s flexibility.
As RESPs can remain open for up to 36 years, Ms. Gray says one option for families of students taking a gap year is to continue to contribute to the plan, even though those contributions are no longer eligible for the CESG, as the gains are still tax-deferred. Those who have already maximized the CESG portion of their RESPs can also consider putting their new savings in a non-registered or a tax-free savings account during their gap year.
Meanwhile, clients whose children already took a gap year in 2020-21 and will be withdrawing from their plan this year need to be sure to set aside enough to cover taxes on any taxable government assistance programs the children may have received, such as Canada Emergency Response Benefit or the Canada Emergency Student Benefit, Ms. Thompson says.
When these benefits are combined with the withdrawal of a taxable amount from an RESP, there may be additional tax implications for students, she says.