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