Yahoo Finance Front-loading and free money: How to maximize your child's RESP
National average undergrad tuition for 2022/23 academic year was $6,834, up 2.6% from last year
With the cost of post-secondary tuition seemingly ever rising, most parents can use all the help they can get when it comes to maximizing their child's Registered Education Savings Plan (RESP).
"My very, very favourite kind of money is free money. So I think at a minimum, people should try to get the full eligible grant per beneficiary," Megan Sutherland, a Calgary-based senior investment advisor at BMO Nesbitt Burns, told Yahoo Finance Canada in an interview.
She tells clients to aim for RESP contributions of $2,500 per year to take advantage of the $500 grant the federal government will provide. The ultimate total grant amount that can be earned in an RESP is $7,200, which amounts to $36,000 in contributions.
Since the lifetime contribution limit into an RESP is $50,000, there's technically $14,000 in potential contributions that won't be eligible for an additional government grant.
That $14,000 should be "front-loaded" into the RESP, Sutherland says. Contributing that money early will allow it to compound over a longer period of time and boost the plan's overall return, she adds.
The latest Statistics Canada data show the national average for undergraduate tuition in the 2022/2023 academic year was $6,834, an increase of 2.6 per cent compared to the previous year.
However, tuition fees can vary widely depending on the province and field of study.
For example, undergraduate tuition in Nova Scotia was $9,328, or 36.5 per cent higher than the national average, StatCan says.
On top of tuition, parents should consider other post-secondary education costs such as books, rent and food, all of which have also jumped in recent years.
Choosing an investment strategy
Sutherland says whether a client chooses to be more conservative or go for growth-oriented investments depends on their objectives and risk tolerance.
Some RESP holders feel they already have a 20 per cent return on their contributions because of the government grants, so they opt for safer fixed income investments that can currently earn five per cent or more, she says.
Once you get closer to needing the money, I think it's really important to have a strategy to start to make sure that that money is going to be accessibleMegan Sutherland, BMO Nesbitt Burns
Others look at the long timeframe before their child reaches post-secondary age and opt for riskier stocks.
"But I generally think even if you're going to do a more growth-oriented strategy, you should err on the side of caution and be conservative," she said.
She has implemented an index strategy for some clients that periodically purchase exchange-traded funds that track the TSX Composite or S&P 500.
For investors who opt for more risk early on, she advises that they move to conservative investments as the post-secondary start date nears.
"Once you get closer to needing the money, I think it's really important to have a strategy to start to make sure that money is going to be accessible," Sutherland says.
"So maybe it's laddering GICs, maybe it's putting a little bit in cash – whatever that looks like – I think it's really important to make sure that you're not taking unnecessary risk."
RESP withdrawal strategy
The federal government made good on a budget promise earlier this year to raise the withdrawal limit on the government grant portion in an RESP during the first 13 weeks of a full-time student's school enrolment to $8,000, from the previous $5,000 limit.
Withdrawals can be taxable or non-taxable. The non-taxable portion is the original amount contributed by the parent or grandparent while the government grant money and investment profits are taxed in the hands of the student, which in theory is likely in a low tax bracket while they're completing school.
Sutherland warns students to check RESP eligibility criteria because only certain post-secondary institutions and programs (in terms of number of weeks and hours of study) can qualify.
She has seen clients whose child wanted to go to a U.S. institution or take a short four-week program, both of which didn't qualify for RESP government grants, so some of the grant money was clawed back.
Unusually large RESP withdrawals could also grab the attention of the Canada Revenue Agency (CRA), she says. It's best practice to keep a record of how the withdrawals are used because the CRA could audit you if you take out more than seems "reasonable," she explains.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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