Registered Education Savings Plans are all about helping kids get a post-secondary education. But for anybody with a RESP and children ready to start school,<\/p>\n
The economic turmoil caught many parents off guard, experts say, as many focused on getting contributions into the plan and didn’t look at its allocation.<\/p>\n
\u201cIn an RESP, you are very time sensitive in terms of when you need the money,\u201d says Peter Lewis, vice-president at Canadian Scholarship Trust Foundation. \u201cThey were in investments that were far too high risk for the time period they have left before they\u2019re going to need to start using the money, so they end up taking a hit.\u201d<\/p>\n
Lewis says the recession served as \u201ca major wake-up call\u201d to many parents that they have to have a good, sound long-term plan for their RESPs.<\/p>\n
\u201cThe sad fact is that they weren\u2019t paying attention (to their investments).\u201d<\/p>\n
FEDERAL CASH BACKS RESPS<\/span><\/strong><\/p>\n RESPs have been a mainstay investment for parents for many years.<\/p>\n The beauty of an RESP contribution is that the value of the investment brings an immediate return: the federal government’s Canada Education Savings Grant \u2014 launched in 1998 to help offset the increasing costs of post-secondary education by supplementing Canadians’ educational savings \u2014 will match annual RESP contributions by 20, 30 or 40 per cent depending on the family income to a maximum of $7,200 over the life of the plan.<\/p>\n \u201cAny one child can receive up to $7,200 \u2014 and this is free money,\u201d explained David Ablett, director of tax and estate planning at Investors Group. \u201c Because these grants are invested and placed into an RESP on an on-going basis, they generate investment income, just like the contributions do.\u201d<\/p>\n Choosing the right mix of investments depends on how long the parents have to save \u2014 that is to say, how old the child is \u2014 and their risk tolerance, and experts say parents need to educate themselves to support \u2018\u00a0 their childrens\u2019 future prospects.<\/p>\n Ablett suggests parents think of their RESPs as they would their retirement savings.<\/p>\n In general, the idea is the same for RESPs and RRSPs: The closer you get to retirement \u2014 or in this case, school \u2014 the less you want to invest in stocks and the more you want to be in safe instruments such as government bonds.<\/p>\n CHANGING INVESTMENT STRATEGIES<\/span><\/strong><\/p>\n \u201cWhen you\u2019re starting an RESP for a new-born child, you have to think to yourself that the investment time horizon you\u2019re looking at would be between 18 and 22 years,\u201d says Ablett. \u201cSo in that situation, I think you need to have a significant equity component in your RESP.\u201d<\/p>\n Ablett says that while equities may carry a certain level of risk, they\u00a0 also offer the greatest growth potential. \u201cIf all your holdings for safety sake is money-market type instruments or GICs, you just don\u2019t have that earnings potential there.\u201d<\/p>\n Once they start high school and the time horizon to university is shorter, then it’s time to look at more secure money-market options, he advises.\u00a0 When the child is to start his or her post-secondary schooling in three years or less, the portfolio should be free from largely liquid assets, and parents should shift away from equities and into ultra-safe investments.<\/p>\n REDUCING THE RISK<\/span><\/strong><\/p>\n There are alternatives out there for people who want to limit their risk exposure.<\/p>\n Some analysts suggest purchasing target-date funds, also known as life-cycle funds, which are diversified investment vehicles that have a specific target end date. Some also offer a guaranteed amount at maturity.<\/p>\n Meanwhile, Lewis\u2019s Canadian Scholarship Trust Foundation offers group plans that guarantee the capital of an individual\u2019s investment.<\/p>\n \u201cWe are a specific type of securities in the investment world (that) mandates us to protect and preserve the capital that\u2019s invested,\u201d Lewis says.<\/p>\n \u201cWe\u2019re invested in a way that means that the capital\u2019s going to be there when your child\u2019s ready to go to school and you\u2019re going to get a stable return over time,\u201d he says, noting that it has no equity exposure.<\/p>\n \u201cWe\u2019ll never give you a 20 per cent return, but we\u2019ll also never give you a negative return.\u201d<\/p>\n CST’s annual return has been averaging about six per cent, and Lewis is keen to point out that his funds have been\u00a0 unaffected by the economic downturn.<\/p>\n He does admit his funds aren\u2019t for everyone. \u201cI\u2019m not going to say that ours is the right one for every family. It\u2019s clearly not.<\/p>\n \u201cSome families are interested in taking a little bit more risk with their money and are looking at equity funds where you\u2019re looking at higher growth,\u201d he says, \u201cBut if you\u2019re looking for a simple option, ours works for most families.\u201d<\/p>\n Build an RESP first<\/span><\/p>\n As for the enormously popular Tax-Free Savings Accounts in which many Canadians have been parking their money, the financial experts say it isn\u2019t that attractive of an investment option for a child\u2019s education.<\/p>\n \u201cEven though the TFSAs have a lot of advantages, we still think parents should be using the RESP \u2014 if only to maximize the grants,\u201d Ablett says.<\/p>\n \u201cWe also believe the RESP is the best way to save for the post-secondary education for your child,\u201d Lewis agrees.<\/p>\n There are a number of strategies parents can use with a TFSA in combination a RESP.<\/p>\n Once parents have invested the maximum contributions needed to qualify for the $7,200 grant, then Lewis suggests parents put any additional money into a TFSA.<\/p>\n Another option, Ablett says, is to park the money in a TFSA first and to wait and make sure the child is likely to go on to post-secondary education. (RESPs face heavy penalties if the beneficiary does not attend school.) \u201cAnd then at that point, you can switch over and put some money away in the RESP, to ensure you get the grants.\u201d<\/p>\n Savings always pay off<\/span><\/p>\n \u201cWe are strongly recommending parents look at the Tax Free Savings Accounts as a way to supplement the RESP,\u201d Ablett says.<\/p>\n Lewis says that despite these difficult economic times, a savings program for a child is a must.<\/p>\n \u201cIf you\u2019ve lost a lot of money and your child\u2019s two years old, you still got a period of time to recover,\u201d Lewis says.<\/p>\n \u201cBut it certainly underscores the importance of families staying on top of their investments and understanding what the risks are and making sure they\u2019re comfortable with those risks.\u201d<\/p>\n Ablett adds: \u201cThe main point is that we certainly think the RESP should be the cornerstone of building savings for a child\u2019s education.<\/p>\n \u201cI think if there\u2019s one area that parents are willing to invest in, it\u2019s in the child\u2019s education. I think parents understand the need to make sure there are funds available if they do go to school.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" Registered Education Savings Plans are all about helping kids get a post-secondary education. But for anybody with a RESP and<\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[231],"class_list":["post-1151","post","type-post","status-publish","format-standard","hentry","category-personal-finance-2010","tag-philip-ling"],"_links":{"self":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/1151","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1151"}],"version-history":[{"count":12,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/1151\/revisions"}],"predecessor-version":[{"id":4347,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=\/wp\/v2\/posts\/1151\/revisions\/4347"}],"wp:attachment":[{"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1151"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1151"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.cusjc.ca\/ottawainsight\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1151"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}