10/03/2014 12:29 EDT | Updated 12/03/2014 05:59 EST

Despite All Their Benefits, RESPs Are Underused in Canada

Digital Vision. via Getty Images

The Registered Education Savings Plan (RESP) has become the most underused, yet indispensable tax shelters designed to make post secondary education more accessible to children and grandchildren. As a mother of three teenagers and having grown up in the era where an undergraduate or graduate program meant a mountain of student loans and part-time jobs, one can certainly attest to the fact that there is no other government plan as well positioned for every Canadian family. Unfortunately, many of us don't use the RESP and if we do, we typically don't maximize the benefits available.

You are probably already aware of the 20 per cent Canadian Educations Savings Grant (CESG) on the first $2,500 that you contribute each year, per beneficiary ($500/year to a lifetime maximum of $7200), but you may not know the strategic ways to maximize the plan value without increasing your deposits.

If you don't start a plan as soon as your child is born, you are leaving free money on the table. Even if you're unsure whether your child will attend a post secondary institution, consider setting up a family RESP regardless. At the very least your contributions are returned to you, but increasingly, children will use the funds to attend one of the wide variety of eligible post-secondary educational programs and institutions. Also, the funds accumulated in the plan can be rolled into your RRSP for those with contribution room or transferred within the family plan to benefit a sibling.

Timing is important and beginning late has significant consequences. For example, if you begin a plan when your child turns 10 and you contribute $2,500 per year until they are 18, you'll have contributed a total of $20,000 and collected $5,000 worth of Canadian Education Savings Grant (CESG). You'll have a total of $30,079.69 saved up for your child's or grandchild's post-secondary education, assuming a 5 per cent return.

If instead, you start those contributions when they are born and stop eight years later, you'll have contributed the exact same amount, but the plan will be worth $48,996.65 by the time they're 18. That's an impact!

If you haven't started a plan yet, it isn't too late! Up to $1,000 of CESG 'catch-up' is available for missed contributions.

Even though the maximum 20 per cent CESG grant tops out at $500 annually, per beneficiary, there are good reasons to pony up early. In a strategy of investing $10,000 when your child is born, and $2,500 each year thereafter, you will have contributed the maximum amount of $50,000 per beneficiary and collected the maximum lifetime CESG of $7,200, but you will also have sheltered these investments from tax for a significant period of time. Moreover, by investing early, you are in a position to fund almost $30,000 in annual expenses each year, for four years. Again, that assumes a moderate 5 per cent, tax-free rate of return.

Lastly, remember that investment choices in an RESP are not limited to GICs and bank deposits. In fact, eligible investments including bonds, mutual funds, publicly traded stocks, exchange traded funds (ETFs) and other listed securities that are eligible for your RRSP, RRIF and Tax Free Savings Account (TFSA) are also options for investing in an RESP.

Don't forget that aunts and uncles can set up an RESP for their relatives also, not just parents and grandparents, and lastly, depending on the province you reside in and your income level, additional grants may be available to you for no more effort than applying for them.

This information should not be construed as investment advice, nor can it take into account your own specific circumstances. The opinions formulated within this article are based on sources believed to be reliable and may not reflect the opinions of any organizations that I am affiliated with.