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How can I safeguard my children’s education savings plan?

Similar to the RRSP season, many investors plunk down a contribution at the last minute and forget about it for the rest of the year. Many people think of registered education savings plans as a tax-free savings plan for their kids without considering a strategy.

Because these education savings plans are earmarked for your children’s future, the same strategy applies as with any prudent investment to maximum returns and minimize risk. As with any investment decision, age and risk tolerance are key considerations in the choice of investments. In the case of RESPs, the age of your child and how long you have to invest is the criteria. If you start investing very early, for example, you’ll have close to 20 years to invest before your child needs the money. If the investments in the plan have a long-term horizon to smooth out volatility and benefit from the power of compound growth, the equity market has historically outperformed other investments. But equity investments may not fit in with your risk tolerance, especially in uncertain markets.

To smooth out volatility, financial professionals recommend the same principles that apply to all investment strategies – put your investment eggs in different baskets to reduce risk. That may mean an asset mix of some equity investments and bonds and balanced funds, for instance. But keep in mind, your comfort level with investments is most important. High quality bonds and money-market funds are considered conservative, low-risk investments.

As your child gets older, you may want to reduce risk even more, as the time frame before s/he needs the money becomes shorter.

When your child reaches the stage of post-secondary education, s/he will be writing cheques for tuition and books. It only makes sense that sufficient investments are kept liquid to reduce the risk of selling investments in an RESP at an inopportune time.

Characteristics of RESPs

  • Contribution deadline for current tax year: December 31st.
  • Maximum annual contribution per child: $4,000.
  • Grant payable: called the Canada Education Savings Grant (CESG): 20% of the first $2,000 in annual contributions.
  • Maximum grant per year: $400.
  • Tax deduction for RESP contributor: none.
  • Tax consequences: when funds are withdrawn, all income taxable in the hands of the beneficiary.
  • Contributions can be made to a plan for a maximum of 21 years.
  • Educational institutions eligible for funds: along with colleges and universities, post-secondary institutions now include vocational and technical schools.
  • Lifetime contributions per child: maximum $42,000.
  • Foreign content rules do not apply to RESPs: no limit on foreign content investments.
    • Recognize that the rules and limitations on RESPs vary among financial institutions.

Your best safeguard
Investing in RESPs should be done with the same care as with any investment account. A trusted financial advisor can offer you the best advice to suit your needs, goals and risk tolerance.