Almost half of eligible Canadians are missing out on tax-deferred growth, government grants and compound returns, ultimately leaving money on the table.Andrii Dodonov/iStockPhoto / Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors. For more from Globe Advisor, visit our homepage.
While Canadians have access to several government-sponsored registered savings plans, the registered education savings plan (RESP) is often overlooked. Too many are underusing this valuable vehicle, particularly when the rising cost of higher education is putting college and university out of reach for an increasing number of young Canadians.
The RESP has existed for decades, but growth of its usage has stagnated in recent years, according to Statistics Canada data. In 1999, one year after the implementation of the Canada education savings grant (CESG) – in which the government matches 20 per cent of contributions into each child’s account, to a maximum of $500 a year – roughly 16 per cent of families with at least one child younger than 18 had an RESP account. Growth continued steadily, with half of Canadians holding an RESP account in 2016.
But that number has edged forward only marginally in recent years. That means almost half of eligible Canadians are missing out on tax-deferred growth, government grants and compound returns, ultimately leaving money on the table.
Clients can contribute a lifetime limit of $50,000 to an RESP for each child. The CESG offers up to another $7,200 in total grants, provided the contributions are made over time, as annual maximums apply. For lower-income families, the Canada Learning Bond contributes up to $2,000 to an eligible child’s RESP without a personal contribution required.
The RESP is also a strategic investment choice to grow money on a tax-deferred basis – particularly in light of changes to the capital gains inclusion rate, which increased on June 25 from one-half to two-thirds for all capital gains exceeding $250,000 a year for individuals.
Investing in an RESP is not tax-deductible, but taxation on any income or growth earned on the contributions, as well as the grants and bonds, is deferred until there’s a withdrawal from the plan.
When the child begins attending a post-secondary institution, the funds can be withdrawn and taxed in the child’s hands, likely in a lower tax bracket. The child may also be able to reduce the amount of taxes owing using the tuition tax credit.
Through an RESP, advisors can take the guesswork out of the future, helping clients prepare for their children’s higher education in a gradual, smart and strategic manner.
RESPs and the rise of inflation
Inflation has dominated the discourse in the past couple of years – and for good reason. Canadians have felt its effects, pinching pennies to combat the surging cost of living. While inflation has cooled recently, prices are still painfully high on everyday expenses – and higher education is no exception.
Today, a four-year degree in Canada costs an average of $75,000 when accounting for residence fees. That number is projected to rise by 39 per cent over the next 18 years, leaving many new parents to come up with six figures for their child’s post-secondary degree and residence. Textbooks, rent and food costs have also seen a marked increase.
Advisors must remind clients that RESP funds can be used to cover all these expenses, as well as other associated education costs such as transportation and supplies. A long-range savings strategy can help offset the rising cost of higher education.
Advisors should encourage clients, particularly new parents, to open an RESP as early as possible to maximize tax-sheltered growth. Clients will then have the option to invest RESP contributions based on their risk tolerance and time horizon. The sooner an RESP is opened, the longer the savings have to compound over time.
Inflation is beyond our control, but advisors can help clients plan for it. A comprehensive financial plan that incorporates an education savings strategy, with tools such as targeted portfolios designed specifically for RESPs, can help counter rising costs and keep higher education within reach for the next generation.
Too many Canadians are missing out on the value of an RESP. But when used, and maximized, the accounts can be a powerful education savings tool.
Damon Murchison is president and chief executive officer at Winnipeg-based IG Wealth Management.
For more from Globe Advisor, visit our homepage.