SUR­VEY

The low rate of RESP adop­tion is an op­por­tu­nity for ad­vi­sors to dis­cuss the im­por­tance of ed­u­ca­tion

Investment Executive - - FRONT PAGE - BY RUDY MEZZETTA

Cana­di­ans who es­tab­lish RESPs for their chil­dren are set­ting them up for fi­nan­cial suc­cess.

cana­di­ans who es­tab­lish reg­is­tered ed­u­ca­tion sav­ings plans (RESPs) for their chil­dren are set­ting their kids up for fi­nan­cial suc­cess later in life be­cause there’s a direct cor­re­la­tion be­tween hav­ing post-sec­ondary ed­u­ca­tion and wealth, ac­cord­ing to re­cent re­search from Mis­sis­sauga, Ont.based Credo Con­sult­ing Inc.

The re­search comes from the Fi­nan­cial Com­fort Zone Study, an on­go­ing na­tional con­sumer sur­vey that Credo con­ducts in part­ner­ship with Mon­treal-based TC Me­dia’s i nvest­ment group. (TC Me­dia pub­lishes In­vest­ment Ex­ec­u­tive.)

Among the Cana­di­ans Credo sur­veyed whose high­est ed­u­ca­tion level is a post­grad­u­ate de­gree, 23% have in­vestible as­sets of $500,000 or more while 43% have in­vestible as­sets of $100,000 or less. Among sur­vey par­tic­i­pants whose high­est ed­u­ca­tion level is a post-sec­ondary de­gree, 11% have in­vestible as­sets of $500,000 or more while 64% have in­vestible as­sets of $100,000 or less. Only 8% of sur­vey par­tic­i­pants whose high­est ed­u­ca­tion level was a high-school di­ploma have in­vestible as­sets of $500,000 or more and 72% have in­vestible as­sets of $100,000 or less.

How­ever, Credo’s re­search found that not enough par­ents are tak­ing ad­van­tage of the ben­e­fits as­so­ci­ated with RESPs.

Credo asked Cana­dian par­ents who were sur­veyed to rate the im­por­tance they as­cribed to ed­u­ca­tion. Among par­ents who gave ed­u­ca­tion a high rat­ing of im­por­tance and who had one or more chil­dren liv­ing at home, 49% in­di­cated they had es­tab­lished an RESP for their chil­dren. Sim­i­larly, 45% of par­ents who gave ed­u­ca­tion a medium rat­ing of im­por­tance and who had one or more chil­dren liv­ing at home in­di­cated that they had es­tab­lished an RESP for their chil­dren.

In con­trast, only 15% of par­ents who gave ed­u­ca­tion a low rat­ing in terms of im­por­tance and who had one or more chil­dren liv­ing at home had es­tab­lished an RESP for their chil­dren.

This rel­a­tively low rate in RESP adop­tion among par­ents with young chil­dren — par­tic­u­larly among those who as­cribed a low level of im­por­tance to ed­u­ca­tion — is an op­por­tu­nity for fi­nan­cial ad­vi­sors to im­press upon their clients the im­por­tance of an ed­u­ca­tion to a child’s fi­nan­cial well­be­ing and the power of RESPs to help fund an ed­u­ca­tion, says Hugh Mur­phy, manag­ing direc­tor with Credo.

“Ad­vi­sors who help their clients ap­pre­ci­ate the real value of ed­u­ca­tion — and the power of ed­u­ca­tion to im­prove an in­di­vid­ual’s lot in life — are po­si­tion­ing them­selves apart from ad­vi­sors who don’t help on this front,” Mur­phy says.

RESPs are reg­is­tered ac­counts that al­low in­di­vid­u­als — typ­i­cally, par­ents — to save money for their chil­dren’s ed­u­ca­tion. Con­tri­bu­tions to an RESP are not tax-de­ductible, but all earn­ings re­al­ized in the plan ac­cu­mu­late tax-free un­til with­drawn. The fed­eral gov­ern­ment also pro­vides a grant in the amount of 20% of an­nual con­tri­bu­tions per child, to a max­i­mum of $500 a year and $7,200 per child over the life of the plan.

When monies from the plan are with­drawn, the con­tri­bu­tion amounts are tax-free, while earn­ings and grant amounts are in­cluded in the child’s in­come so long as he or she is at­tend­ing an eli­gi­ble post-sec­ondary in­sti­tu­tion.

“[The RESP is] a fan­tas­tic in­vest­ment ve­hi­cle,” says Hi­malaya Jain, wealth ad­vi­sor and port­fo­lio man­ager with Sco­ti­aMcLeod Inc. in Toronto. “When you think about the grant com­po­nent — that is, if you put in $2,500 for a child in a year, the gov­ern­ment gives you $500 — that’s a 20% guar­an­teed rate of re­turn.”

Young par­ents should con­trib­ute to a child’s RESP as soon as pos­si­ble, says Kevin Dun­phy, a fi­nan­cial plan­ner af­fil­i­ated with In­vest­ment Plan­ning Coun­sel Inc. in St. John’s, N.L. Al­though RESP rules per­mit catch-up grants of up to $1,000 a year on con­tri­bu­tions of $5,000 for par­ents who didn’t make con­tri­bu­tions in pre­vi­ous years, es­tab­lish­ing an RESP later in a child’s life will limit the po­ten­tial com­pounded growth.

“Even par­ents of mod­est means should be able to put away $100 a month for their child’s post­sec­ondary ed­u­ca­tion,” Dun­phy says. “Get the ba­sic gov­ern­ment grant, let [con­tri­bu­tions and grants] grow at a rea­son­able rate of re­turn over 18 years, and that should add up to $35,000-$40,000.”

Par­ents who are look­ing to se­cure the max­i­mum RESP grant may be able to ap­proach their own par­ents to see if they’re will­ing to con­trib­ute to grand­chil­dren’s RESPs, says Sara Kin­n­ear, direc­tor of tax and es­tate plan­ning with In­vestors Group Inc. in Win­nipeg.

How­ever, hav­ing a par­ent rather than a grand­par­ent es­tab­lish and be the sub­scriber of the RESP is prefer­able, Kin­n­ear says — es­pe­cially in sit­u­a­tions in which the child doesn’t end up at­tend­ing a post-sec­ondary in­sti­tu­tion. The rules gov­ern­ing the re­turn of RESP con­tri­bu­tions and in­come to a grand­par­ent sub­scriber in those sit­u­a­tions could re­sult in unfavourable tax con­se­quences.

“From a plan­ning point of view,” Kin­n­ear says, “I usu­ally rec­om­mend that par­ents be the sub­scribers and the grand­par­ents just give the par­ents the money.”

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