TORONTO — Registered Education Savings Plans, or RESPs, can help a family sock away thousands of dollars toward post-secondary education, but a big lack of awareness has meant few Canadians take advantage of the savings vehicles.
Canadian RESPs were ranked among the most generous savings plans in the world in a 2007 study by the Organization for Economic Co-operation and Development. But the program is only being used to a fraction of its potential, said Rock Lefebvre, vice-president of research and standards at the Certified General Accountants Association of Canada.
Ottawa paid out about $650 million in Canada Education Savings Grants in 2008. If every household were to invest $1,000 annually in an RESP, it would cost the government $4.5 billion, said Lefebvre, co-author of a recent report on the state of RESP investments in Canada.
``What that indicates to me is that Canadians are relying on or tapping into the Canada Education Savings Grant to around 14 per cent of its full potential,’’ he said.
``It might be awareness, it might be apathy, it might be lack of understanding.’’
The basic concept behind an RESP is simple enough. Anyone — parents, grandparents, other family members or even friends — can go to a bank and open an RESP for a child beginning as soon as the child is born. The money can be put in an investment vehicle of the family’s choice and the government will then match a portion of the contributions, depending on the family’s income level. Children can access the money when they begin post-secondary education — they pay tax when they withdraw it, but often at a much lower level than their parents would, since the typical student has little or no income.
However, the government offers its contributions through what can sometimes seem a bewildering array of alternatives, experts say.
In 1998, the government introduced the Canada Education Savings Grant, or CESG, which provides 20 cents on every contributed dollar up to a maximum of $500 annually and $7,200 over the life of the plan.
Beyond this, an enhanced CESG was introduced in 2004. This allows lower-income families to earn an additional 10 cents or 20 cents, depending on their income, per contributed dollar up to the first $500 contributed annually.
Finally, there’s the Canada Learning Bond for low-income families. This gives families an initial $500 contribution towards their child’s RESP — meaning they can open one without any investment on their part — and will deposit a further $100 annually to a maximum of $2,000.
With all these different vehicles, a low-income family that contributes only $150 a year to an RESP could save more than $8,200 by the time their child is 17 — enough to cover nearly two years of tuition in some post-secondary programs. However, only 16.3 per cent of those eligible for the Canada Learning Bond use it, while uptake for the CESG is only 39.3 per cent, according to a recent report by Social and Enterprise Development Innovations, or SEDI.
``It’s very easy to become overwhelmed and even relatively apathetic because it sounds so convoluted,’’ Lefebvre said, adding that it’s often difficult for low-income families to figure out which grants they qualify for.
This is exacerbated by a lack of knowledge among the financial institutions that provide RESP accounts, said Adam Fair, managing director of the Canadian Centre for Financial Literacy, which is run by SEDI.
Most financial institutions don’t widely market RESPs, and many staff are often ill-equipped to inform prospective clients about the program and associated government grants and benefits, according to the SEDI report.
``Sometimes we would be educating the bank branches on the process and what forms to use and what not to use, and how someone would be able to open up an RESP without even having to deposit money at that specific time,’’ Fair said.
SEDI recommended that the government create additional training resources for financial institutions, including a checklist they could use when working with clients.
There’s no doubt an RESP is the best way to save for your child’s education no matter what your income level, said David Ablett, director of tax and retirement planning at Investors Group.
But even if you open an RESP when your child is born and take full advantage of the available government grants, rising tuition rates mean you may need to put more money aside if you don’t want your child to be burdened with student loans.
``Parents should try and do a projection of anticipated education costs, then figure out how much money is likely to be generated by the RESP at a fairly conservative rate of return,’’ Ablett said.
If there’s a shortfall, Ablett recommended parents consider also using other savings vehicles, such as a tax-free savings account.