One of the biggest benefits for clients opening a registered education savings plan (RESP) is the “free cash” the Canadian government provides in the form of grants. But many clients may be inadvertently missing out on these grants by postponing the educating planning process, according to James Rogers, financial advisor with Toronto-based Macquarie Private Wealth in Vancouver.
“If a client hasn’t opened an RESP account and their child is around 10 or 11, then this becomes a much stronger focus to have that discussion with them,” says Rogers. “There are only so many years you can maximize the government grants and the government only lets you catch up for a missed year, one year at a time.”
To start the process, advisors should first help clients decide on the type of RESP plan that works best for their family.
Individual vs. family plans
Both individual and family RESPs allow a subscriber to open an account in a beneficiary’s (child’s) name to save for post-secondary education. In an individual plan, the child does not have to be related to the subscriber and can be any age when named, whereas in the family plan, the child(ren) must be related to the subscriber by blood or adoption and the child must be under the age of 21 when named.
“Family plans provide a great option because children are all different and as a parent you don’t know what one sibling will do later in life compared to the other,” says Rogers. “It’s more flexible in a family plan.”
Rogers always recommends the family plan to clients — even if the child is the first-born. “It just allows for more freedom and simplicity and we can add on the beneficiaries in later years as they are born.”
If children have large gaps in age, however, Rogers notes that separate plans may be necessary since an RESP can only be open for 35 years.
Pooled plans vs. self-directed plans
Clients have the option of managing their RESP investments independently (or with an advisor) through a self-directed plan, or having the investments managed by a scholarship trust company through a pooled plan. In pooled plans, the client’s principal is protected.
“We generate stable fixed income-type returns over the years, so while you might never see double digit returns, you are also not going to see negative returns because you don’t have a huge amount of volatility,” says Peter Lewis, chairman of the RESP Dealers Association of Canada.
Pooled plans can be set up as individual, family or group plans. Clients in group plans contribute a fixed amount, and the funds are collectively invested to maximize growth in fixed-income investments. Clients in individual or family plans can choose their own contribution rates while still protecting their principal.
In contrast, clients with self-directed plans are responsible for choosing their contribution rates and investments, and are not guaranteed that their principal will be protected.
All RESPs have lifetime maximum contribution room of $50,000 for each beneficiary, and beneficiaries can receive a lifetime maximum of $7,200 in grants. Grant money is deposited directly into an RESP account and accumulates income alongside the subscriber’s contributions.
These grants include:
> Canadian Education Savings Grant (CESG)
The CESG adds 20% annually to the first $2,500 contributed to an RESP. That amount can also be increased to 40% on the first $500 contributed, if the child’s family has income for the year of $41,544 or less; or 30% on the first $500 contributed, if the child’s family has income for the year that is more than $41,544 but less than $83,088.
>Canada Learning Bond (CLB)
The CLB is linked to the National Child Benefit Supplement received with the Canada Child Tax Benefit (or children’s special allowance). An initial $500 is provided when the beneficiary is first eligible and additional payments of $100 are made for each eligible year up to the year the child turns 15. The CLB has a maximum lifetime total of $2,000.
“This grant provides a great incentive for low income families because it isn’t based on contributions so it is available regardless of how little they put into the child’s RESP,” says Sara Kinnear, director of tax and estate planning at Investors Group Inc. in Winnipeg.
> Quebec Education Savings Incentive (QESI)
Quebec residents are eligible to receive a refundable tax credit that is equal to 10% of net RESP contributions per year, up to a maximum of $250. The lifetime maximum is $3,600 per beneficiary.
> Alberta Centennial Education Savings Grant (ACES)
The ACES adds $500 to an RESP for each child born to Alberta residents since 2005. The grant also provides $100 to an RESP for children attending school in Alberta at age 8, 11 and 14 in 2005 or later, and where a $100 minimum contribution was made into the RESP within 12 months prior to the ACES application. The RESP must be an individual or family plan where all beneficiaries are siblings. There is no lifetime limit for the grant.
This is part two of a three-part series on education planning. Tomorrow: TFSAs, trusts and other savings vehicles.