I need to open a registered education savings plan (RESP) for my kids. I understand there are a few different types and am trying to figure out which one is best. Can you help?
Considering that tuition fees are rising far faster than inflation, any smart parent who wants to raise even smarter kids needs to start saving as soon as possible.
The RESP is a place where your savings can grow tax-free. On top of the tax break, many parents are lured to RESPs by an additional sweetener: the Canada education savings grant (CESG), which is the amount the federal government will throw in on top of your contribution. Depending on a family’s income, the CESG can range up to $600 on an annual contribution of $2,500, and can rise to a lifetime maximum of $7,200 per child. This is free money (assuming you don’t have to pay it back if your child decides to join the circus instead of attending university).
There are three different types of RESPs: individual, family and group plans. Which plan is best depends on how much money parents want to set aside and how strict they want to be about making contributions. “One of the first questions I always ask is, ‘How many children are you going to have?’” says James Kirk, a certified financial planner with Winnipeg-based Sweatman Insurance & Retirement Services.
The individual plan, as the name implies, pays for the education of one beneficiary, while the family plan allows for multiple children in a family to be named as beneficiaries.
Mr. Kirk sees family RESPs as being more flexible if some but not all of your children go to college or university, because the money can be transferred to the other kids in the plan. While it is possible to transfer an individual plan to another beneficiary, Mr. Kirk says the family plans make it easier.
You can open an RESP at a bank, a credit union, a mutual fund company, an investment dealer or a group-plan dealer. In general, individual and family plans offer you more room to choose your own investments than group plans. Individual and family plans can also be cheaper than group plans if you choose a self-directed plan and tilt your holdings toward low-cost exchange-traded funds.
Group RESPs are offered and administered by companies that offer group scholarship plans. In contrast to individual and family plans, the money in group plans is pooled with the contributions of other investors. Investments are chosen by the fund, not the people contributing to it.
Sellers of group RESPs say these plans are aimed at investors who want a more disciplined form of savings, because people enrolled in the plan are usually required to make regular contributions over a certain period of time.
“The group plan is a very structured program that allows people to save and to achieve a result that they might not otherwise achieve if they were left to their own devices,” said Paul Renaud, chair of the RESP Dealers Association of Canada, which includes five member companies that represent approximately 90 per cent of the industry.
According to Statistics Canada, about 27 per cent of RESP assets held by Canadians in 2012 was in group RESP plans, down from 33 per cent of RESP holdings in 2010.
Group RESPs charge fees for enrolment, administration and processing. There are also penalties for missed payments, as well as pulling out of the plan early. The Investor Education Fund, a non-profit organization established by the Ontario Securities Commission, warns that investors who pull their money from a group plan in the first few years will get back a lot less than they put in because of sales charges.
Group plans have been under increased regulator scrutiny in recent years after complaints about a lack of transparency with some of the investments. The OSC stepped in last year and has forced some of the funds to improve their compliance systems.