All About the RESP

All About the RESP

Invest in Youth! Invest in Canada! Back to School! Registered Education Savings Plan time!

Every parent – or uncle or aunt or grandma or grandpa or brother or sister or friend and supporter of Canada’s youth and education – should open an RESP for the student(s) of their choice. This way the student receives valuable federal (also provincial in some cases) matching grants, and gets to tax-shelter investment income. And – most importantly – will not be held back for years and years after college or university by costly student loans. As Canadians we must do all we can to educate our youth, and move heaven and earth to make sure our future citizens and leaders are not burdened with unmanageable student loans at the very time they should be spreading their wings with their newfound education and talent. Good RESP plans for our Canadian youth are vital, and are an honour to contribute to.

PARENTS AND OTHER EDUCATION SUPPORTERS NEED TO MAKE THREE KEY DECISIONS WHEN OPENING AN RESP:

1) DETERMINE THE TYPE OF RESP ACCOUNT YOU WANT TO OPEN

There are different kinds of RESP accounts. The two main types are self-directed plans and pooled programs. Avoid pooled programs – such as scholarship plans! They are costly and unnecessarily complex. With most scholarship plans upwards of three years of your first RESP installments will go towards fees, and little if any money goes to education savings. The wise RESP subscriber/donor must keep things simple, low cost and flexible. This can be achieved with self-directed RESPs. Again, avoid pooled Scholarship programs as they almost invariably require a minimum deposit, compulsory regular contributions and have costly up-front and ongoing service fees. And they can be extremely costly to get out of once the subscriber finds out how much they actually cost compared to how miniscule the benefits are. In short, avoid Scholarship Plans (pooled programs). They cost too much, and deliver little, if anything. They are fee-driven.

Make sure your RESP program is self-directed; that is, directed by YOU as to which investments to make. Avoid institutional RESPs where someone else decides what to invest your RESP money in. YOU know best.

Pooled RESPs – that is, scholarship plans – have features that are unnecessarily complicated. Before you open an RESP you should absolutely ensure that you have the right to transfer your RESP if you are not satisfied with its performance. With pooled scholarship plans it is very expensive to transfer out of the program. They like to lock you in. Penalties to transfer to better investments are economically prohibitive. Do not invest in an RESP that does not allow you to change plan providers anytime that you are not satisfied with your RESP’s performance. The key to a successful RESP is accumulating earnings through compound interest, not paying fees to scholarship plan providers.

2) WHEN TO CONTRIBUTE TO AN RESP?

Most pooled scholarship plans have a set dollar contribution to be made at specified times. The self-directed RESP lets you decide when YOU want to contribute, and how much YOU want to contribute. You can skip a year, or contribute more, depending on your financial situation. This is important given the financial stress that many young families go through while raising a family.

Age 15 is a key year for RESP planning, particularly in terms of maximizing the Canada Education Savings (CES) Grant benefit to RESP subscribers. We recommend parents and other subscribers contribute at least $2,000 to the RESP, or have made $100 yearly payments for 4 years, before age 15. If this is not done, then children are not eligible for the CES Grant if contributions are made between the ages of 15 to 17.

There is often confusion around how much CES Grant may be carried forward if contributions to an RESP are not made in a given year. CESG amounts are allowed to accumulate (beginning in 1998) until the end of the year in which a child turns 17 (subject to the special rule above). This is good news for parents and other RESP subscribers who were not able to start an RESP right away.

Unused CESG amounts can be carried forward for use in future years:

1998 to 2006: Up to $400 is added to the CES Grant room for each eligible child per year since 1998 (or since birth if the child was born after 1998).

2007 or later: Up to $500 is added to the CES Grant room for each eligible child per year since 2007 (or since birth if the child was born after 2007).

The maximum yearly RESP contribution is $5,000 that would receive the matching basic CESG of $1,000. In other words if a subscriber were to contribute the full allowable life-time $50,000 RESP for a beneficiary of age 14 it would not be possible to receive the full $7,200 CES Grant.

For parents eager to begin contributing to an RESP to obtain the maximum CESG we recommend contributing $2,500 per year for the first 14 years and $1,000 in year 15. This strategy enables the contributor to obtain the maximum grant amount of $7,200 ($36,000 x 20 per cent).

Another strategy combines the above (contributions over 15 years) with an additional contribution of $14,000. Although the $14,000 would not attract the CES Grant, the extra dollars invested would maximize the lifetime contribution limit of $50,000.

Parents who have children 10 years old should begin an RESP immediately if they are looking to obtain the full $7,200 CES Grant.

To help parents determine the latest point at which they can begin contributing to an RESP, and still receive the full $7,200 in CESG, we have inserted the table below. It assumes that the subscriber will contribute the maximum amount possible in order to attract the maximum CES Grant.

AGE OF SUBSCRIBER CONTRIBUTION CESG
10 $ 1,000 $ 200
11 $ 5,000 $ 1,000
12 $ 5,000 $ 1,000
13 $ 5,000 $ 1,000
14 $ 5,000 $ 1,000
15 $ 5,000 $ 1,000
16 $ 5,000 $ 1,000
17 $ 5,000 $ 1,000
18 $ $
$ 36,000 $ 7,200

* CES Grant above assumes only the basic grant. Additional grants may be available from certain provinces and/or for low-income families. In some cases parents can wait until age 11 if they are receiving grants beyond the basic CESG.
The table provides a catch-up strategy which involves contributing $1,000 when your child is 10 and $5,000 (maximum yearly contribution amount eligible for matching CESG) each year between ages 11 and 17. This enables you to obtain the maximum amount of federal government money ($7,200).

3) PARENTS AND BENEFACTORS MUST CHOOSE THE ‘RIGHT’ RESP INVESTMENT

In a pooled scholarship plan you have no choice or flexibility with respect to the types of investments you prefer in your RESP. That’s why RESP subscribers should avoid pooled scholarship plans. RESP investors must be able to decide what they want their RESP money invested in. With a ‘self-directed’ RESP they can do this. It’s clearly the best option. Again, do not invest in an RESP you cannot easily – and without cost – transfer out of in favour of a better plan. Do not get ‘locked in’ to an RESP.

Risk should be avoided throughout the life of the RESP investment. Speculative plays such as stocks and mutual funds do not belong in something as important as a child’s education program. There is no need to gamble with something so important. The simple stress-free trouble-free compound interest investment is best for the RESP. Steady, reliable growth.

Why gamble when you don’t have to?

DON’T SPECULATE — JUST INVEST!

DOs & DON’Ts of RESP INVESTING

DO NOT put your money into pooled ‘scholarship’ plans. Not only are they unreasonably complex, but they are fee-driven and return little, if anything, on your money.

DO NOT speculate and take chances with volatile stocks and mutual funds. In short, do not gamble with a child’s education fund. You don’t have to gamble, you don’t have to speculate. Just INVEST!

DO NOT put your RESP money into a fund that you cannot transfer out of easily and at no cost.

INSTEAD:

INVEST your RESP funds only in secure stress-free trouble-free compound interest investments. Steady consistent reliable growth is what you want.

INVEST your RESP funds only in ‘self-directed’ plans that YOU control.

Fisgard Asset