The most underused saving vehicle in Canada is the registered education savings plan.
I’m starting to wonder if one of the reasons is the disinformation being spread about RESPs. “I keep reading that RESPs aren’t all they are cracked up to be and we run the risk of losing this money if the kids don’t go to college or university,” a reader wrote recently. “Are RESPs outdated? Is there a better way to save for them so the money will be available for [our grandchildren’s] education?“
The answers to these questions, respectively, are no and no. RESPs are only outdated and outclassed if you can find a better deal than the 20-per-cent grant the federal government offers on annual RESP contributions of $2,500 or less a year (lifetime maximum is $7,200).
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The vulnerability of RESPs is that the money must be used by the beneficiary for a postsecondary education. However, the rules are very broad. Colleges and universities qualify, and so do many training and trade schools. Postsecondary schools outside Canada may also qualify.
A recent Royal Bank of Canada study on postsecondary costs found that the median university graduate working full-time earned 63 per cent more than the equivalent high-school grad in 2015. But let’s say a child or grandchild with an RESP decides not to pursue an education after high school.
Frankly, I’d do nothing with an RESP if a young adult in his or her late teens or early 20s made that decision. An RESP account can stay open for up to 35 years, which leaves plenty of time for young adults to work a few years and then decide to upgrade his or her education,
Failing that, money in a family plan RESP can be shifted to another beneficiary. It’s also possible to transfer up to $50,000 of investment income from an RESP to your registered retirement savings if it has enough contribution room.
We should be clear on one thing: Federal grant money paid into an RESP must be returned to the government if the beneficiary does not continue his or her education after high school. Money that was contributed to the RESP over the years can be withdrawn tax-free. Investment growth is taxed at your usual rate, plus an extra 20 per cent.
Setting up a tax-free savings account (TFSA) to use the funds for education for a child or grandchild could be considered an RESP alternative, but only in a limited way. While money in TFSAs can be used for anything, you have to be 18 to have an account and there’s no federal grant money.
Dwelling on the weaknesses of RESPS may be causing people to overlook their much more powerful benefits. That may be a reason why RBC found that only 51 per cent of eligible individuals are RESP beneficiaries.
Rob Carrick