Why Aren’t You Using an RESP?
Back when my children were born – so about 15 years ago – the RESP wasn’t the RESP we have today and I wasn’t convinced it was the best deal going. But over time, the product has improved, the legislation has been made more user-friendly, and the reasons to use it have become crystal clear.
There are still plenty of people in Canada who aren’t using an RESP to save for their children’s future education. Only about 35% of eligible kids receive the Canada Education Savings Grant. That’s the money the Feds GIVE you to put money away for your kids. Really? The Feds want to GIVE you money and you don’t want to take it? Whazzup with that?
Don’t have any money to save, you say? Hmmm. The Canada Learning Bond provides $500 for low-income families to establish a RESP account and allows for an annual contribution of $100 but only has an 8% participation rate. Whazzup with THAT?
If you haven’t been contributing to an RESP for your kids, it’s not too late to catch up on the whopping $7,200 CESG you may have been missing out on. Starting in 1998, the CESG accumulates every year for a child until he turns 17.
While there is no maximum that you can put into an RESP each year, there is a $50,000 lifetime limit. So you can catch up for years in which you did not make a contribution. The basic grant room is $400 per year from 1998 to 2006 and $500 from 2007. The maximum a child can receive in a calendar year is $1,000 provided grant room is available, so don’t be tempted to catch up too much at once. Each year you can catch up for roughly one year of missed contributions.
Let’s say you made no RESP contributions for Molly Magoo who was born in 2000. The total CESG room Molly would have accumulated would be $3,800 ($400 for the years 2000 to 2006 and $500 for 2007 and 2008). If you set up an RESP for Molly this year, you can contribute up to $5,000 and grab a grant of $1,000. Yup. You put in 5 and the Feds give you 1… that’s an automatic 20% return on your money, before it’s even invested.
You have to be careful where you get your information on RESPs. When I looked at the CIBC Wood Gundy site on November 19, 2008, the info on the site was incorrect. It hadn’t been updated since the last set of changes. And when I went to the Morningstar site, again, old info. Whazzup with that? How does any financial institution justify having incorrect information anywhere on it’s website where it might be picked up by a search engine? Shame!
The best place to go for info is straight to The Horse’s Mouth.
One of the questions I get quite often is “How much should I save?” That’s a tough thing to answer since it depends in large part on how much you can afford. Aim for the maximum amount of CESG for which your kids qualify. If you can afford to put away more, do it. Post-secondary education won’t be getting cheaper any time soon.
A note of caution. I am not of fan of Group RESPs – typically called Scholarship Trusts – which have about 30% of the market. A study prepared for the federal government on RESPs found that group scholarship trusts have a number of drawbacks including the fact that:
- You must pay an enrolment fee and make contributions according to a preset schedule.
- If you close a Scholarship Trust RESP before maturity, you forfeit the enrolment fee plus any investment gains and government grant money. So if you can’t keep up with the preset contribution schedule, you lose. And, no, you can’t simply transfer the plan. They won’t let you.
- Some scholarship trust plans deny payments to students who are entitled to these benefits under government rules because some scholarship trusts don’t recognize all courses of study. If your child chooses something outside the plan’s parameters, they won’t be able to use the money in the plan.
- If the group scholarship plan is cancelled for any reason, you get your contributions back, net of fees and without the investment income. The grant money is also repaid to the government, and cannot be earned back later if new contributions are made for the same beneficiary.
- Scholarship trusts have high fees. The report notes that in 2006, 20% of gross contributions went towards fees.
If you haven’t opened up an RESP for your wee one yet, today’s the day. It doesn’t have to be a ton of money. Can you manage $100 a month? $50? $25? Just get started. And the next time The Grandparents want to know what to get Molly McGoo for her birthday, a toy and a small contribution to her RESP will keep her happy on her special day and give her options in the future.