Has COVID-19 impacted investments in RESPs?
Based on a MoneyTalk Life article published May 12, 2020
Disruptions due to COVID-19 mean many post-secondary bound kids have had their final high school terms interrupted. And it appears that some of those who were looking forward to moving away in the fall, may end up starting university from their own bedrooms. Amid all this uncertainty, parents are also facing issues as volatile markets may have affected the value of their children's Registered Education Savings Plan.
What is a RESP?
A Registered Education Savings Plan (RESP) is an option for you to save towards a child's post-secondary education. It allows you to contribute to the future education of the RESP beneficiary with the additional benefit of the government matching part of this contribution. Depending on the investments held within the RESP, changes in the market, like those we're experiencing during this global pandemic, could lead to changing values of investments held within the plan.
If you have questions about your RESP, you may not be alone. Chris Gandhu, High Net Worth Planner, TD Wealth looks at some things to consider.
What should I do if the value of the investments in my child's RESP has fallen?
Remember everyone’s situation is different. You should have a discussion with a financial professional about your own unique outlook. Also, if your child is more than five years away from university or college you may not need to worry — your investments have the potential to recover overtime.
If the RESP doesn't have enough funds to cover tuition and additional expenses at the start of the school year, there are other options that you could consider such as scholarships, bursaries and student aid.
If you decide to borrow money temporarily, it's important to make sure you don’t get overburdened by high-interest rate loans. Using the Canada Student Loan Program (CSLP) may be a good option. There are proposals to change the CSLP which will make eligibility easier, allow for greater amounts to be borrowed, and to double the grant portion of the loan which do not require a repayment.
If my child did not work this summer, how should I manage RESP withdrawals?
Many people plan to pay for each year's tuition and living expenses using a combination of their RESP and a student's wages. If you've been saving in an RESP and are faced with a shortfall, it may still make sense to use the RESP funds to help with expenses in the near-term.
But what happens if you use funds from the RESP early and end up with a shortfall down the line? You – and your student - can continue contributing to the RESP, potentially increasing your contributions if you're able to and make up the deficit in the interim. A financial professional can help you decide the best course of action.
Does it make sense to pause RESP contributions?
Before deciding to pause your contribution, remember that RESPs are a good way to save funds for education with the opportunity for the funds to grow tax-free, so if you can afford to contribute it may be worth continuing. It's understandable that you might worry about current economic conditions, but if you stop making contributions you may miss out on any potential growth in the market.
1TD Economics, North American Forecast Update: Data Confirms Scale of Economic Collapse, April 20, 2020
2The Power of Staying Invested, TD Asset Management
This content discusses current topics of interest in a general and informational manner only and may not be appropriate in all circumstances. Please ensure that you seek advice personalized for your situation from the appropriate professional, consultant or subject matter expert on the topic of interest to you.
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