Post-secondary education is looking dramatically different this year. As the pandemic lingers, and universities and colleges offer online-only courses, fewer students are living and learning on campus. With that reality comes a new financial quandary for families who have faithfully squirrelled away money for years within their children’s registered education savings plans (RESPs).
The main issue facing these families is what to do with those assets during this time of uncertainty? After all, for students opting to live at home, it means saying goodbye to $15,000 or so for residence and a meal plan this year. Travel and entertainment costs are likely to be curtailed, too. And some students have decided to take a gap year and skip the pandemic-impacted year entirely, hoping to get the whole frosh experience next year.
That means some investors may be confused about how best to earmark the extra money in their RESPs these days. Despite this new reality, Scott Evans, financial advisor at BlueShore Financial in North Vancouver, B.C., insists basic planning is still most important.
“Kids may be staying closer to home or not having as many expenses, but for the most part, the strategy hasn’t really changed,” he says. “You should still be checking in with your portfolio, becoming more conservative as your time horizon shrinks and all the things we would always do.”
Even so, the following four considerations should help advisors manage both funds in an RESP and client expectations during the coming year so that parents and students have what they need when they need it.
Make sure everyone knows the rules
Regardless of whether there’s a pandemic taking place, it’s important that clients know the basic rules about RESP withdrawal strategies. That means knowing the difference between the three buckets that make up an RESP: the Post-Secondary Education Payments (PSE), which are the contributions investors make to the plan; the government-funded education assistance payments (EAP), which consist of the Canada Education Savings Grant; and the growth of those assets. It’s important to note that the EAP and the growth are taxed while the PSE is not.
Paying attention to the EAP is particularly important, especially if investors have more money in their RESPs than they will now likely need. The temptation might be to leave the EAP grant contribution invested for later, even though a maximum of $5,000 can be withdrawn in the first 13 weeks of schooling. But that strategy could lead to a “use it or lose it” scenario years down the road if there are still EAP funds in the account upon graduation.
If a family still hasn’t withdrawn enough of the EAP contribution this semester, there’s still time.
“It’s the grant money that you want to be careful with because if you don’t use it all up, there are tax consequences down the road,” Mr. Evans says, noting that there can be penalties too. “You don’t want it to get trapped in there.”
Consider government assistance programs
It’s also important to pay attention to the student’s income this year, including any Canada Emergency Response Benefit (CERB) or Canada Emergency Student Benefit (CESB) they may have received, says Robyn Thompson, president and certified financial planner at Castlemark Wealth Management Inc. in Toronto.
If the beneficiary, the student, takes out too much from the RESP’s taxable portion and that’s combined with income and/or government pandemic funding, the combined amount could send the student into a higher tax bracket “because both the CERB and the CESB are taxable benefits.”
Parents of children who are working through their gap year should take note of this as well.
An RESP with a proper asset allocation means scaling back on risk as high school graduation draws near. That strategy likely saved many families from financial worry back in March when markets tanked and the funds held within their children’s RESPs were nestled safely in highly conservative vehicles. But should the money stay in money market funds and other fixed-income vehicles? For many families with lower risk tolerance and who are particularly rattled these days, that strategy makes sense, Mr. Evans.
“You want to make sure your time horizon matches what you’re invested in,” he says. “If it’s an undergraduate degree, you have four years – and anything can happen during a four-year period.”
Asset allocation also depends on how much other wealth a family has, Ms. Thompson says, and how important the RESP is for funding the child’s education.
If there’s room for flexibility, the portion that wouldn’t be needed for another three or four years, could be invested in something that earns a greater return. Laddered guaranteed investment certificates are a good bet. The same goes for a student who plans to use some of the RESP to fund a master’s degree years from now and has an even longer time horizon.
It’s also important that investors take any other children they have who are coming up the line after today’s RESP recipient. While the time horizon is finite at four years and shorter for the first child, it’s longer for children two, three or four. So, while the funds for the first student might be very conservative now, “take into account that you still have eight years potentially before you make the last withdrawal,” Mr. Evans says.
RESP funds can also be transferred to other children, but again, be careful about withdrawing enough of the EAP grants for each one or there may be more than the allowable maximum of $7,200 left in the account.