Monitor RESP as high school graduation nears

OTTAWA – It’s easy to open a registered education savings plan, but financial experts say such plans need to be watched closely in order to maximize the benefit, especially as your young student approaches graduation.

A portfolio of growth stocks may be the way to go while you’re still changing diapers. But financial advisers say parents should consider becoming more conservative with investments as their children near graduation from high school and start looking at post-secondary options.

It may be tempting to stay in stocks, especially if they’ve been winners, but consider what you would do if they plummeted, leaving substantially less money saved to pay for tuition.

Lana Robinson, an executive director at CIBC Wealth Advisory Services, says how soon and to what extent you’ll want to shift the portfolio depends on individual risk tolerance.

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“If you have one child or a couple of children in the plan at different ages, that might affect your decision of when you get more conservative,” she said.

“But as a general rule, I think it would make sense to have a more growth-oriented portfolio in the early years and begin to pare that back as we get closer to actually using the funds.”

Mike Davies, a certified financial planner with Alterna Savings, suggested making the shift to safer investments when the student is around 14 or 15.

“The last thing that you want to have happen is what we saw in 2008, 2009, when the stock market went down almost 50 per cent,” he said.

“You don’t want to have your education plan blow up in your face… You want to protect your asset by scaling down and scaling out of higher-risk investments.”

Meanwhile, it pays to remember that all funds in an RESP* are not treated the same way in the eyes of the taxman when withdrawn.

Money contributed to the account can be taken out tax-free and without restrictions. However, the investment income that has piled up over the years, as well as the government grants, are taxed as income in the hands of the student when taken out.

Davies suggests withdrawing the investment income and grant money before contributions just in case the child drops out of school and doesn’t go back.

“If the plan eventually has to be closed, at least you’re using up all of the government’s money first,” he said.

Depending on a student’s income and their tuition and education tax credits, they may not have to pay any tax at all on the money withdrawn.

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However, pay students receive during co-op placements as well as from summer and part-time jobs can add up. So students who expect to earn enough to incur taxes need to ensure they have the cash to pay the bill come tax time.

You may also want to consider the timing of withdrawals from an RESP to limit the potential tax bill, depending on need and what your child’s summer job prospects look like or when co-op work placements take place.

There are also some limitations as to how much of that money you can withdraw at the start, depending on what sort of program the student is enrolled it.

Robinson suggests, generally, that it’s probably better to spread the withdrawals out, but added students should look to use RESP* savings before turning to student loans or other borrowing.

“I wouldn’t recommend increasing a student loan balance if you don’t need to,” she said.