RESPs mean government grants for a child's post-secondary education

TORONTO - Diapers? Check. Extra clothes? Check. RESP?

The Registered Education Savings Plan, an investment account for your child’s post-secondary education, may be an unusual item to include in your diaper bag checklist. Still, experts say the government grants you will receive are the best reasons to start early and contribute often.

"For every dollar you put in, up to a limit, the (federal) government tops you up by 20 per cent,” explained author and financial blogger Dan Bortolloti.

Through the Canada Education Savings Grant, the federal government makes a 20 per cent matching contribution on the first $2,500 invested annually to a maximum of $7,200 for the life of the plan. Additional government contributions are also available for those in the lower income bracket.

Overall, the contributions you make for a child are limited to $50,000 over the life of the plan.

While parents might think those contribution numbers hard to attain, consider this — according to a study from Statistics Canada in 2009-2010, a four-year post-secondary program in 2013 will cost an average of $73,600 with residence fees. That cost is expected to jump 58 per cent to $116,200 in 2030.

Apart from the grants, another advantage of an RESP is that the income generated from the investments within the plan is tax free until the money is withdrawn when the child goes to school.

"Most students don't make a lot of money so even if they do make money doing part-time jobs or summer jobs, they usually have enough tuition credits to get down to a zero tax bracket," said Bortolloti.

The free money is one of the main reasons Sheryle Daguio, 33, started two of her three kids on an RESP early on.

She has received close to $2,000 in grants for her eldest child, who is now six years old, since opening up a plan. For her middle child who's two, she has received about $400.

Apart from the federal program, there are two provinces that offer additional grants.

Those living in Quebec can receive a lifetime grant of $3,600 and those in Alberta can get up to $800.

Saskatchewan will soon be joining these provinces. Last December, it approved a bursary which offers a maximum lifetime grant of $4,250 per beneficiary.

In its provincial budget, the B.C. government said it will deposit $1,200 into an RESP account for children when they turn six. The budget, however, is unlikely to pass before the writ is dropped for the scheduled May 14 provincial election.

Setting a monetary goal is key before opening up a plan, says George Hopkinson, president of Knowledge First Financial.

Once you figure out how much you need, take a close look at how much room you have in your budget. If you opt for a monthly contribution, Hopkinson says you have to commit to it and make sure you can afford it.

Hopkinson adds that starting early helps you take advantage of the compounding effect.

"If you start when your child is a baby versus when a child is 10 years old and you’re making the same contribution, you have 50 per cent more when you start when the child is young because of the compounding effect."

But what if you're late in the game?

The unused grant contribution room is carried forward, but you're only allowed to catch up on $2,500 of unused grant contribution room per year.

The last year any grants can be received is when the child turns 17.

Let's nail down the basics before you open up an account.

There are two types of RESPs, one is an individual plan where you can name only one beneficiary. If you're a grandparent or friends of the family who would like to give an RESP, this one is for you.

The other is a family RESP account where one or more beneficiaries are named. As the name suggests, the beneficiary would have to be connected to the subscriber by blood, marriage or adoption.

Both allow you to transfer funds to other siblings of the beneficiary.

Next on the list is knowing how you’d like to invest. Self-directed accounts are available through banks, credit unions, discount brokerages or from financial advisors while group, pool or scholarship trusts are available through group dealers.

For families, financial experts suggest opening up a self-directed family account since it helps you cut costs on fees. However, one drawback is you’ll have to keep tabs on how much money each beneficiary gets.

If you enrol in a group plan, as the name suggests, it groups your beneficiary with other children who are born in the same year.

"You share together in the income as you move through and when it comes out, you'll get a predetermined amount of income that you'll get based on how well that pool of income" performed over time, explained Hopkinson, whose company is among the five that offer group plans.

"If you're disciplined to make the payment, you can be extremely happy (with the group plan.)"

Stay-at-home mom Daguio opened an account with a group plan. Now that she's gaining more investment knowledge, she's looking at going self-directed for her youngest, who is 10 months old.

Bortolloti, the blogger behind investment advice website Canadian Couch Potato, said that apart from lower fees in the self-directed account, there’s also more flexibility in investing and taking your money out compared to a group plan.

"Scholarship trusts keep their money in bonds and conservative investments, which is fine except the growth is really slow and they have their high fees," said Bortolloti, who cautioned that people need to be aware of those fees.

"These plans made sense 20 years ago when there were no options... But it’s not a product I would recommend."

If you’re opting to go the self-directed route, Bortolloti’s investment strategy is to keep it simple: "Fifty per cent fixed income and 50 per cent stocks. Keep a portfolio like that until your kid is in high school. Then start scaling back a little bit."

About four to five years before withdrawal, you want to put the money in a more conservative investment to lower the risk.