RESPs: A good idea for hockey kids?

Funding youth hockey is expensive for parents. The more elite their children get, the greater the fees.

A high price, considering only 0.1% of Ontario hockey kids will ever play one game in the NHL (for more, see “Is the hockey dream worth the investment?”). And, even if that child beats the odds, he may want to attend school after his career.

More likely, though, he’ll simply proceed to university after high school. It’s your job to help parents budget for ongoing hockey fees, while simultaneously funding an RESP for post-secondary schooling.

But it can be a tough sell if they’re certain their kid is the next Sidney Crosby. Present them with these scenarios.

Scenario 1: Child goes to school after a hockey career. Is the RESP beneficial? Yes.

An RESP can remain open for 35 years, giving a player the opportunity to return to school even after a successful NHL stint. The average career length of all retired NHL players is 5.65 seasons, says website Quant Hockey. While the player may have been earning a large salary during those seasons, he may choose to go back to school after retiring. The RESP money would be taxed in the hands of the player, since he is the program beneficiary. In most cases, a beneficiary is in a lower tax bracket than the parents.

This may not be the case for high-earning NHLers, but Frank Di Pietro, Mackenzie Investments’ director of tax and estate planning, says, “If the hockey player’s career is over, they’re likely going to see a sudden drop in tax bracket.” If at that point the player chooses to go back to school, he’ll be taxed at his new, lower tax bracket.

Even better, Di Pietro shows how an RESP can grow if the child doesn’t go to school right away.

When child goes to school at age 18

• Annual contributions to RESP from age 1-14: $2,500
• Contribution at age 15: $1,000
• Total contribution: $36,000
• Total Canada Education Savings Grant (CESG): $7,200
• Estimated annual rate of return: 6%
• Size of RESP at age 18: $81,000

When child goes to school at age 30, after career

• Annual contributions to RESP from age 1-14: $2,500
• Contribution at age 15: $1,000
• Total contribution: $36,000
• Total CESG: $7,200
• Estimated annual rate of return: 6%
• Size of RESP at age 30: $163,000

The benefits of RESPs

Corina Murdoff, investment advisor at Dundee Goodman Private Wealth, says an RESP “is an easy way for people to save for their children’s education as well as having the government contribute to the plan.”

Although there’s no annual contribution limit, the government provides Canadian Education Savings Grants (CESGs) only on the first $2,500.

If a parent were to invest the maximum lifetime amount of $50,000 into the child’s RESP, the government would contribute $7,200 in grant money, Murdoff says.

Frank Di Pietro, Mackenzie Investments’ director of tax and estate planning, adds, “One of the greatest features of an RESP is that the contributions and grants inside the plan can grow on a tax-deferred basis.”

Scenario 2: Child doesn’t go to school after hockey career. Is the RESP beneficial? Yes, as a safeguard.

If the player has an extended career, or stops playing and immediately starts a hockey-related career (such as coaching or broadcast commentating), what happens to the funds in the RESP? Subscribers (the people who opened the RESP, likely parents or grandparents) can transfer the funds to the player’s sibling.

If he doesn’t have one, subscribers can receive the money as a lump sum, known as an accumulated income payment. Here’s how that works under the different types of plans.

Family plan

“With a family RESP,” says Di Pietro, “it gives parents more flexibility to allocate money amongst other family members.” This plan requires the child to have at least one sibling, and the subscribers must include each child on the plan when it’s opened.

Further, it’s a good idea for parents to allocate amounts for each child. That way, they can maximize their Canada Education Savings Grants, and there’s no confusion about whose money is whose.

If the hockey-playing child doesn’t attend post-secondary, the funds can easily be transferred to his sibling. If the funds are transferred to someone other than a sibling, like a cousin or friend, the subscriber will have to return the grants to the government. Di Pietro adds that, based on legislation, the growth on grants and contributions can be transferred to the new plan.

When transferring funds to another RESP, ensure the account can accommodate the increase. If CESGs exceed the maximum of $7,200 per beneficiary, they have to be repaid.

Individual plan

Parents would select this plan if they have only one child, since there’s only one named beneficiary. Parents can have individual plans for each child, and there’s no penalty to transfer RESP funds between them (provided the receiving child hasn’t maxed out her CESG). If subscribers want to transfer funds to someone else, they would have to repay any CESGs.

However, parents with more than one child should consider family plans because any fund transfers are easier, especially if one child decides not to attend post-secondary.

Parents can consolidate individual accounts as long as the receiving RESP beneficiary is under 21 and a sibling.

Accumulated income payments

If no child goes to school, subscribers can withdraw the funds as an accumulated income payment (AIP).

When an RESP closes, contribution money is returned to the subscriber, tax-free. CESGs go back to the government, and the earnings on both the contributions and the CESGs are returned to the subscriber in the form of an AIP, says Di Pietro.

The AIP is taxed at the subscriber’s tax rate, plus a 20% penalty. But, the subscriber can avoid tax and penalties if the AIP is paid directly to the RRSP (provided there’s contribution room). There is a $50,000 limit per subscriber.

To receive an AIP, three conditions have to be met:

• the subscriber must be a Canadian resident;
• the plan has to have existed for at least 10 years; and
• the intended beneficiary must be at least 21 years old.

If a child and his family were to leave Canada to pursue the child’s pro hockey career, the parents wouldn’t be eligible for an AIP, since they wouldn’t be considered Canadian residents. Di Pietro suggests, in such a situation, that the parents keep the RESP open as they could be eligible for the AIP down the road.

Tax planning for hockey players

Let’s say your client’s child makes it to the major leagues. Wayne Bewick, a partner at Trowbridge Professional Corporation in Toronto, says residency is a top concern for NHL-player clients.

Alberta has the lowest provincial tax rates for high incomes. Stateside, Florida’s a good choice because it has no state income tax. But some players aren’t willing to relocate, so they’re stuck with their home turf’s rates.

Superstars typically have endorsement deals well after they retire. This can make it worth the expense of setting up a corporation. “They can get the endorsement income paid into the corporation, which pays dividends out to [shareholding] family members in lower brackets.”

The ex-player also takes dividend income and is taxed at his normal rate, but the family’s overall tax bill’s reduced.

Bewick notes most players can get additional tax savings through prescribed-rate family loans.

Saving for both education and hockey

Di Pietro suggests hockey parents simultaneously put funds in RESPs and TFSAs.

“They could consider splitting out that $5,500 TFSA contribution and allocating the first $2,500 to RESPs, so that you get the grants, and then your contributions over and above that go to the TFSA,” he says.

Other vehicles to save for education include in-trust-for accounts and even RRSPs, says Di Pietro.

“Under the Lifelong Learning Plan, you can take out up to $20,000 from an RRSP without having to pay tax on that withdrawal. And, as long as you are enrolled in qualifying education programs and the money’s repaid within 10 years, there are no tax implications,” says Di Pietro.

The catch is that the RRSP would have to be in the name of the child, and RRSP accounts can’t be opened until age 18.

So, Di Pietro says, if there’s room, a subscriber could transfer funds from the child’s RESP to the subscriber’s RRSP to mitigate tax penalties if the child has a professional career, or chooses not to go to post-secondary at all.

The other option, an in-trust-for account, is simple, says Di Pietro. “It allows a parent to set aside funds in an investment account where the money is for the benefit of the child.”

The child could normally access the account at 18, and spend the money as he or she chooses. Parents could ask the child to use the funds only for education purposes, but financial responsibility may not be top-of-mind for many 18-year-olds.

Instead, parents could set up a formal trust, which would allow them to stipulate how the funds should be used.

Investing for both education and hockey

Corina Murdoff, investment advisor at Dundee Goodman Private Wealth in Calgary, recommends putting 20% into short-term investments for incidentals. She would suggest this mix:

• 20% in the money markets “for liquidity;”
• 30% in ETFs because “the MERs are quite low;”
• 30% in individual equities (“look at dividend-paying companies where you’re getting a consistent cash flow”) and
• 20% in a global or U.S. mutual fund for diversification.

Also, 80% should go into long-term, income-producing investments. This would accommodate both a short and a long hockey career.

Murdoff would suggest this mix:

• 40% in a laddered bond, “because ideally, at age 18, he’ll be going to school. And each bond would mature the year he’d be attending school, so you have four bonds in that ladder;”
• 20% in a mutual fund (“with the markets being strong, I would probably look for a global, dividend-paying mutual fund”) and
• 20% for individual equities and ETFs, “primarily focusing on income on the ETF that pays out on a monthly basis.”

Sarah Cunningham-Scharf is a Toronto-based financial writer.