How RESP strategies change for children at various ages

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People often think of registered education savings plans (RESPs) in terms of contribution years and withdrawal years, but it can be helpful to break contribution years down further.
After all, a lot changes as a child grows from newborn to early teen to later teen, influencing both contribution and investing strategies.
In an ideal world, parents who are (and plan to remain) Canadian residents should open an RESP as soon as they have a newborn’s social insurance number, says Stephanie Dean, manager of financial literacy at RBC Family Office Services in Victoria.
Contributing $2,500 right away results in the maximum $500 Canada education savings grant (CESG) for that calendar year. But even if cash is tight (as it often is for new parents), setting up regular contributions of any amount opens the door to a 20 per cent CESG match and tax-deferred investment growth.
“Getting started is sometimes the most difficult step in the process, so to get the account open and even get a small amount of money going in automatically is great,” Ms. Dean says.
She adds that lower-income families shouldn’t neglect opening an RESP as they may qualify for the Canada learning bond, which provides $500 in the first year and $100 annually after that to age 15 or a maximum of $2,000, without requiring parents to contribute anything.
Per Homer, senior financial planning advisor with WWH Financial Group at Assante Financial Management Ltd. in Mississauga, also encourages new parents to begin saving in an RESP as early as possible. By a child’s first birthday, he points out, there are two calendar years’ worth of CESGs available (with the chance to catch up on one year’s missed CESG).
If parents haven’t been able to take full advantage of those early CESGs, they may want to encourage family and friends to consider a birthday gift that goes toward a child’s education.
“[The CESG of] 20 per cent for free from the government is the best return you can get. There’s no other way I could ever guarantee you a 20 per cent return,” Mr. Homer says.
Young children have a long time horizon for post-secondary education. That translates into an opportunity to invest for generating growth, based on the parents’ risk tolerance. But that time horizon shrinks as children get older.
“Taking too much risk in these accounts can lead to regret and also resentment if the kids don’t have money for school because their parents took a bit too much risk,” says Megan Sutherland, senior investment advisor with BMO Nesbitt Burns in Calgary.
Especially as the window shrinks to five years or less, she recommends reducing risk by moving at least a portion of RESP savings into cash or a laddered guaranteed investment certificate or bond strategy.
Mr. Homer uses target-date funds to transition toward more conservative investments for some clients. The other option is to rebalance portfolios manually every couple of years, tilting gradually toward 40 per cent stocks and 60 per cent fixed income by the time the child is ready to start post-secondary education.
RESP rules may also start to affect planning during the tween and early teen years, Ms. Dean says.
Parents who haven’t contributed to an RESP by the time their child is 10 must start contributing that year to reach the $7,200 lifetime CESG maximum. Meanwhile, parents who have been contributing enough to maximize CESGs starting at birth will hit the lifetime CESG maximum at age 14.
In general, Ms. Dean says that even if parents have attracted all the CESG possible by contributing $36,000 in $2,500 annual increments, it’s worth contributing an additional $14,000 to reach the $50,000 lifetime contribution maximum and take full advantage of the opportunity for tax-deferred investment growth.
At the ages of 16 and 17, a child’s RESP can only receive CESGs if at least $2,000 had already been contributed (without withdrawals) by the end of the year the child turned 15 or at least $100 had been contributed (without withdrawals) in any four years before that date.
So, when Mr. Homer starts working with parents who have a teen aged 15 or younger, he makes sure they’re catching up on contributions so they remain eligible for the CESG at ages 16 and 17.
Some kids in their later teens may also consider delaying post-secondary education. A gap year or two likely won’t affect investing strategies, but a more extended break from school might. Keep in mind that an RESP can remain open until the end of the 35th year after it was established (with an extension to the 40th year in some cases for beneficiaries who qualify for the disability tax credit), so it’s likely worth keeping open even when teens say they aren’t interested in more school right away.
“The good news is, with RESPs, they’ve relaxed the rules to some degree in that there’s a long list of eligible programs. … Even a program of a minimum of 10 hours a week for 13 weeks is going to qualify for a withdrawal. I would exhaust all options before collapsing the plan,” Ms. Dean says.
Overall, while there are advantages to other structures that can help fund post-secondary education – including tax-free savings accounts, non-registered accounts, trusts and accessing cash values from life insurance policies – Ms. Sutherland recommends looking at RESPs first.
One reason is very pragmatic: it’s harder to access the money for any purpose other than education, making it more likely the money will stay inside the account until the child grows up and is ready to use it.
“Be diligent. Set up automatic deposits. Start as soon as possible – as soon as your child is born. [And] understand the rules because there are some nuances,” Ms. Sutherland says.
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