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Market woes offer RESP lessons
Wednesday, April 02, 2003
As if the parents of Ontario's double-cohort students didn't have enough to worry about, add in concerns about covering post-secondary education costs. It's a worry shared by many families across the country who have seen the values of registered education savings plans plummet along with the markets.
That experience offers some real lessons in how to properly treat funds being set aside for schooling, experts say.
When the federal government introduced the Canada Education Savings Grant in 1998, offering a 20-per-cent grant on the first $2,000 contributed to an RESP each year (up to a maximum of $7,200), the stock market was hot, notes Heather Clarke, director of advanced financial planning with Investors Group Inc. in Winnipeg.
"Many people were just madly scrambling to get the grant. It seemed like a sweet deal. They were not using a real systematic approach to investing," she says.
But market turbulence should be seen as a call to action to ensure tuition savings are invested wisely, without a dangerous degree of risk, she adds.
While most investment choices could do no wrong during buoyant markets, "what looked safe three or four years ago may not be safe now," says Dennis Tew, vice-president and controller of Franklin Templeton Investments Corp. in Toronto. "Some people may be scrambling."
But scrambling should not mean acting hastily, he says. If your child's RESP is heavily weighted in equities, it's best not to cash out now and take a hit on reduced values. The equity portion may well rebound in the years until it is drawn on. "Don't yank out [those funds] or decide not to contribute," he says.
For new money, you may want to think about more conservative vehicles, such as balanced or income funds, he says.
Ms. Clarke suggests segregated funds or a bundled group of funds, which offer a mix of investments and automatic rebalancing to match investors' risk tolerance, may work for many families.
The hit that RESPs have taken may make saving outside a plan as well all the more necessary. But those who opt to establish, say, an in-trust account should note some differences, Mr. Tew says.
Unlike registered plans, for instance, an in-trust account in a child's name means that child has freer access to the money. So parents and their children must be in agreement that the money in such an account will be earmarked for education rather than a car or trip.
Families should also remember that RESPS have a carry-forward feature so that, as long as there is a plan open, any past contributions that have been missed can be made up, Mr. Tew says.
If you haven't been saving systematically, now is the time to open a pre-authorized plan to make regular investments to keep savings "chugging along," he adds.
"It's never too late," he says. "With $7,200 plus income on that money, no one's going to scoff at $10,000."
The plans do offer many benefits. While there is no tax deduction for making contributions allowable up to a maximum of $4,000 a year, an RESP offers tax-sheltered growth for the money in the plan. When it's taken out, it is taxed at the child's rate, not the parents' rate. If the child does not go on to higher learning, participants can roll the money into a registered retirement savings plan.
Don't forget suggesting RESP contributions as gifts from family, Mr. Tew says. Your children can also contribute significantly to their education, he adds.
In fact, getting your children to contribute to the cost of their post-secondary education makes more than just financial sense, agrees Ms. Clarke. When your children have worked to help pay for schooling, they are more likely to appreciate that education, she suggests.
According to Statistics Canada, more than 700,000 Canadian families held RESPs in 1999, the latest figures available. And that, says Ian Boyko, is one of the problems inherent with the plans.
"They take scarce public funds and put them in the hands of people who least need it," says Mr. Boyko, who is national chairperson of the Canadian Federation of Students. Families who are able to save for post-secondary education need the grants less than families who cannot save, he argues.
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