The ABCs of RESPs

Save for your child’s future, reap gov­ern­ment grants


Dur­ing my preg­nancy, there were plenty of items I wasn’t sure my child would ever need — like a $400 bouncer or fancy vi­brat­ing bassinet.

But my hus­band and I were cer­tain about open­ing up a Reg­is­tered Ed­u­ca­tion Sav­ings Plan (RESP). In fact, my baby shower was an RESP shower.

The ad­van­tages of an RESP are twofold: First, it’s a sav­ings ve­hi­cle for your child’s ed­u­ca­tion funds, which can grow tax free un­til your child is ready to use them for post-sec­ondary school, up un­til the age of 36.

Se­condly, the fed­eral gov­ern­ment’s Canada Ed­u­ca­tion Sav­ings Grants (CESG) matches 20 per cent of your con­tri­bu­tions up to a max­i­mum of $500 per year, and $7,500 over the life­time of the ac­count, un­til your child is 17 — ba­si­cally it’s free money. There is ad­di­tional sup­port for lower in­come fam­i­lies.

The choices sur­round­ing RESP providers are end­less. Per­haps it’s no sur­prise then that only 50.1 per cent of Cana­di­ans who qual­ify for an RESP open one up, ac­cord­ing to the gov­ern­ment’s last RESP re­view.

To self-di­rect or not to self-di­rect

If you’ve de­cided to open an RESP the first thing you have to fig­ure out is how you want the plan struc­tured: a self-di­rected in­di­vid­ual, fam­ily plan or a group RESP (some­times called a Schol­ar­ship Trust Plan).

An in­di­vid­ual RESP is your only self-di­rected op­tion if you have a sin­gle child or you are giv­ing a child you are not re­lated to a gift. If you have more than one child or are con­sid­er­ing more than one child, you might want to con­sider a fam­ily RESP. The ben­e­fit of this over an in­di­vid­ual RESP is that it be­haves as one pool of money for all of your chil­dren, says Matthew Ar­drey, Toronto-based in­vest­ment ad­viser.

“A fam­ily plan re­duces stress in that you are con­tribut­ing to all of your chil­dren’s’ ed­u­ca­tion at once, and if one child doesn’t go to school, the other chil­dren can ac­cess those funds.”

Afam­ily plan can also re­duce the cost of in­vest­ing, since you have a larger pool of money to work with when buy­ing and sell­ing in­vest­ments.

An in­di­vid­ual or fam­ily RESP is the kind of plan you’ll choose from if you open a plan through a bank. They let you de­cide how much money you want to save, when and what you want to in­vest the money in.

In a group RESP, you in­vest into a pool with a pre­scribed sav­ings sched­ule; each group plan has its own rules around con­tri­bu­tions and with­drawals. You may en­ter into a group plan for a sin­gle child, and he or she doesn’t have to be re­lated to you. This can be an op­tion for those who want a strict in­vest­ment sched­ule and are happy to hand over con­trol of their in­vest­ments to the trust.

Within a group plan, how much your child re­ceives for school when they cash out de­pends on how many in­vestors with chil­dren the same age are in­vested in the plan and how many will be go­ing to a post-sec­ondary school in their des­ig­nated year. While the re­turn of your prin­ci­pal, less en­rol­ment fees, is guar­an­teed at the time of with­drawal, in­vest­ment re­turns are vari­able.

If a child for­feits go­ing to school in the des­ig­nated year, in­vest­ment earn­ings (af­ter con­tri­bu­tions and en­rol­ment fees) from that ac­count stay within the group plan and, in the­ory, are split among the rest of the plan mem­bers el­i­gi­ble to cash out, giv­ing them a boost. Fees Fees will vary de­pend­ing on whether you open an in­di­vid­ual, fam­ily or group RESP.

For ex­am­ple, a self-di­rected in­di­vid­ual or fam­ily RESP won’t charge RESP sales or en­rol­ment fees, but there may be ad­min­is­tra­tive fees or com­mis­sions if you trade in­vest­ments in your self-di­rected plan.

A group plan, how­ever, is a more com­pli­cated fi­nan­cial struc­ture with many dif­fer­ent in­vestors in­volved. Group RESP providers of­ten charge non-re­fund­able sales com­mis­sions or en­rol­ment fees when set­ting up your ac­count. For ex­am­ple, trusts such as Canada’s Schol­ar­ship Plan and Chil­dren’s Ed­u­ca­tion Funds Inc. charge an up­front sales com­mis­sion of $200 a unit, which gets de­ducted from the amount you in­vest in the plan and typ­i­cally wraps in the in­vest­ment man­age­ment fee.

“Schol­ar­ship plans send tin­gles up the back of my neck, be­cause they have a lot of over­head costs, such as the con­sul­tants that will come to your house,” says Jason Heath, a Toronto-based fi­nan­cial plan­ner. “Those costs are go­ing to end up in the prod­uct it­self.”

On the other hand, group RESP providers typ­i­cally in­vest in se­cure fixed-in­come se­cu­ri­ties, which means the prin­ci­pal amount you in­vest is pro­tected. A self-di­rected RESP could be in­vested in eq­ui­ties and other high-risk in­vest­ments than could lose money. Ad­vice at a cost And if you’re con­sid­er­ing a self-di­rected RESP, but think you need fi­nan­cial guid­ance on what to in­vest in, the de­ci­sion gets quite tricky for the av­er­age Cana­dian. Es­pe­cially when you look at the cost of any fi­nan­cial ad­vice, Heath says, which may not be great, de­pend­ing on how much you have to in­vest.

“With­out six fig­ures of in­vestable as­sets, the av­er­age Cana­dian has crummy op­tions for fi­nan­cial ad­vice and is likely get­ting ad­vice from a 22-year-old at the branch level,” Heath says. “In­vestors at branches are of­ten get­ting closet in­dex funds that are bound to lag the (stock mar­ket) in­dex.” Once you know the type of RESP you need, con­sider the level of fi­nan­cial ad­vice you need. Sim­i­lar to any other ma­jor project, whether or not you hire a pro­fes­sional de­pends on the ef­fort you want to put into do­ing your own re­search.

“A fi­nan­cial ad­viser is go­ing to be there to help you se­lect the in­vest­ments and watch over the ac­count,” says Ar­drey. “An ex­pert can help you eval­u­ate your big­ger fi­nan­cial pic­ture and en­sure an RESP fits that and your other goals like re­tire­ment . . . so you aren’t meet­ing one goal to rob your­self of meet­ing the other.”

If you’re will­ing to do the leg­work and are dis­ci­plined enough to set aside money reg­u­larly, a sim­ple self­di­rect RESP could be the way to go. The costs of such a plan are min­i­mal and you get full con­trol over your in­vest­ments.

Banks also make it easy for the RESP holder to file for the Cana­dian Ed­u­ca­tion Sav­ings Grants on their own, says Rosalyn Kent, pres­i­dent and CEO of RBC Di­rect In­vest­ing. “The gov­ern­ment grants ap­pli­ca­tion . . . is in­cluded as part of the RESP ap­pli­ca­tion process on RBC Di­rect In­vest­ing’s web­site, for the client to com­plete at their con­ve­nience.”

A robo-advisor like Wealth-Sim­ple or Wealth-Bar can be a happy medium be­tween a hav­ing a fi­nan­cial ad­viser and the low fees of a self-di­rected ac­count, since a port­fo­lio of low­cost Ex­change Traded Funds (ETFs) is cre­ated for you, based on your goals and risk pref­er­ences. De­pend­ing on how much you have in­vested, a port­fo­lio man­ager can over­see your as­sets elec­tron­i­cally for a fee of about 0.5 per cent or less.

“The ma­jor­ity of Cana­di­ans aren’t DIY when it comes to in­vest­ing and lots of smaller in­vestors could ben­e­fit by hav­ing their mod­est funds man­aged by the type of sup­port a robo can pro­vide,” Heath says.

“Schol­ar­ship plans send tin­gles up the back of my neck, be­cause they have a lot of over­head costs.” JASON HEATH FI­NAN­CIAL PLAN­NER


Only 50.1 per cent of Cana­di­ans who qual­ify for an RESP open one up, ac­cord­ing to the gov­ern­ment’s last RESP re­view.


Group RESP providers of­ten charge non-re­fund­able com­mis­sions or en­rol­ment fees when set­ting up your ac­count.

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