The 2023 federal budget unveiled updates to the rules governing RESPs, including a change to withdrawal limits for the first time in 25 years.kenneth-cheung/iStockPhoto / Getty Images
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Although the concept behind the registered education savings plan (RESP) is a simple one, its components can be complex. Specifically, a lack of understanding has led many potential investors to overlook and underuse this important savings tool.
Yet, financial advisors have the power to promote change and further strengthen relationships with clients. By building knowledge, advisors can inspire Canadian parents to take advantage of government-sponsored programs like the RESP to set the next generation up for financial security and success.
Ultimately, investing in education generates the greatest return.
The evolution of RESPs
Since introducing the RESP in the 1970s, the federal government has made significant changes to the program by increasing contribution limits and allowing unused portions to be transferred to a registered retirement savings plan (RRSP). But the greatest incentive came in 1998 with the launch of the Canadian Education Savings Grant (CESG), a 20 per cent grant to match private contributions for higher education. Six years later, the government announced the Canada Learning Bond (CLB) to help low-income families open an RESP without making any contributions.
The 2023 federal budget unveiled further RESP updates, including a change to withdrawal limits for the first time in 25 years. In a typical year, about 500,000 students withdraw funds from an RESP to help pay for their postsecondary education, according to budget documents.
Full-time postsecondary students can now withdraw $8,000 during the first 13 consecutive weeks of a program, up from $5,000. Part-time students can withdraw $4,000, up from $2,500. Plus, this year’s federal budget increased flexibility, allowing separated or divorced parents to open a joint account or move an existing joint account to another provider. This change makes it easier and more affordable for parents to save for education.
Ottawa has continued expanding the rules around RESPs to incentivize Canadians to save for their children’s education. But to reap its rewards, clients must understand the vehicle first.
Advisors can reinforce the value of RESPs to help offset the rising costs of higher education and work with clients to incorporate an education savings strategy into their wider financial plan.
RESPs are overlooked and underused
The financial burden of parenthood can be overwhelming, leading many to focus on their children’s short-term financial needs rather than taking the long view.
RESPs are available widely to help parents save for their children’s postsecondary education, but many don’t take advantage of the plan. A Canada Life Assurance Co. survey conducted in 2021 showed that while the majority of Canadians (92 per cent) are aware of the program, less than half (49 per cent) use it. Furthermore, only 17 per cent understand the plan’s benefits and contribution limits.
Clients with children who overlook the value of RESPs are leaving money on the table, missing out on government grants to bolster savings and the opportunity to grow their contributions on a tax-deferred basis.
Many delay opening an RESP because they have other savings priorities or because they lack the time and knowledge. But an advisor can help clients understand why and how to leverage this lucrative resource.
For many, higher education is an important but complicated part of a financial plan. But better education unlocks better economic opportunity – and there’s no price tag on that. With tools like targeted portfolios designed specifically for RESPs, advisors can help make saving for postsecondary education more attainable and accessible.
RESP contribution considerations
The key to maximizing the value of an RESP is starting early. Clients who can afford it should invest $2,500 annually per child into an RESP to maximize the CESG, which is $500 per beneficiary per year or $7,200 lifetime. Lower-income families unable to make contributions can leverage the CLB, which provides a maximum of $2,000.
Many prioritize contributions to their tax-free savings account and RRSP, often forgetting about RESPs. By setting up automatic monthly deposits, clients can ensure their children’s RESP will continue to grow independently.
Finally, RESPs are most effective when managed by an expert. Research has shown that investors who work with an advisor experience considerably higher yearly returns and stronger long-term growth in savings than those without one.
RESP advice is no different. An advisor goes beyond just opening an RESP, working with the investor to ensure their RESP goals and timeline fit within their wider financial plan.
Higher education comes at a high cost. But through a holistic savings plan that leverages strategic investment tools – like the RESP – parents can prioritize post-secondary studies for their kids and lessen the financial burden. They just need to understand how. In the name of higher education, advisors can – and must – educate them.
Christine Van Cauwenberghe is head of financial planning at Winnipeg-based IG Wealth Management.
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