Claire is raising her 3-year-old daughter, Josie, in Calgary. As a single mother, Claire has done a phenomenal job nurturing Josie and making sure her needs as a young child are met; however, what weighs on Claire’s mind the most is how she will afford her daughter’s university education in the future. Though Josie is still very young, Claire understands that a university education is the best way for her daughter to gain the skills she’ll need to have a meaningful career down the road.
The good news for mothers like Claire – and indeed, for all families in Canada – is that there are resources that can help.
What is an RESP?
RESP stands for Registered Education Savings Plan. These are plans offered in Canada that are specifically designed to help families and students save for the cost of post-secondary education.
There are 3 components of RESPs. For starters, the Canadian government provides grants to supplement RESPs. Under a federal grant called the Canada Education Savings Grant, or CESG, the government matches 20% of the first $2,500 contributed to an RESP annually, up to a lifetime maximum of $7,200 per child. Provinces like Quebec and British Columbia offer additional education savings incentives or grants respectively.
Secondly, you make contributions to the RESP. If you start early and contribute regularly, you’ll make the most of something called “compounding”. This is where investment income earned on your contributions is reinvested to generate additional investment earnings. This helps your savings grow faster.
And lastly, money in RESPs grow tax-free in the plan, and the investment earnings aren’t taxed until money is taken out to pay for post-secondary school by the student who usually pays little or no taxes
Broadly speaking, there are three different types of RESPs: family plans, individual plans and group plans. Each type of plan has its own set of guidelines.
In a family plan, the amount a subscriber (a parent or grandparent who opens the RESP) contributes and the frequency of contributions is flexible. Money in a family RESP can be used toward the post-secondary education of multiple beneficiaries named in the plan, so long as they are siblings and under the age of 21.
Individual plans are opened for only one beneficiary. The amount a subscriber (or the person who opens the RESP) contributes and the frequency of contributions is flexible and the money in individual RESPs can be used toward the post-secondary education of the named beneficiary.
Group RESPs function a little differently than family or individual RESPs. For those trying to understand what type of RESP is best for them, it’s important to know how group RESPs work.
When you open a group RESP, you agree to invest your contributions, together with those of families who have children born in the same year as your child. The income earned on contributions is then divided among students who are still in the plan at the time of their enrollment in a college, university or other post-secondary education.
A pooled approach means the plan as a whole benefits from a large number of contributions that are being regularly added; in addition, a pooled approach means you can benefit from professional investment management services affordably.
Group RESPs require you to contribute to the plan on a regular schedule but may offer flexibilityin certain situations. Some providers have options that can make it easier for you to continue your RESP if changes such as changing the beneficiary in the plan, changing the contribution amount, pausing contributions for a short period are needed. Some of these options may include:
- Adjusting the amount of future contributions you pay into the plan.
- Changing your contribution schedule. If, for example, you are contributing each month to your RESP plan, you may be able to change this to contribute annually to your RESP.
- Transferring to an individual or family RESP. If you decide to pursue this option, your contributions less any sales charges, in addition to government grants and investment income, will be transferred to either your new individual or family RESP. Some providers may not transfer the income on principal (contributions less sales charges) from a group plan to another plan.
Not sure if this for you? Don’t worry, group RESPs come with a 60-day grace period. You can withdraw your contributions from the plan within 60 days of starting the plan if you change your mind.
There are other features common to group RESPs that you should also know:
- In a group RESP, your money is in investments that are designed to protect your savings, while earning positive returns. More specifically, your principal and any government grants are invested in fixed income securities like government and corporate debt securities. Investment income earned by your RESP, meanwhile, can be invested in equity securities including exchange-traded equity securities, in addition to the fixed income securities already mentioned. Each provider may have different investment strategies, so it’s very important to read their prospectus in detail and understand how your money is being invested.
- Your child shares in the pooled earnings of investors with children the same age. That means when your RESP matures and you are ready to withdraw from your plan, how much money your child receives depends on: (1) how much income is in the group fund and (2) the number of units held for the children in the group who will be starting post-secondary education that year. Investing with others in a group fund gives you access to professional investment knowledge and management in an affordable way.
- As with other types of RESPs, group RESPs have fees which vary from provider to provider. In a typical group plan, the sales charges are taken from early contributions made in the first few years of the plan.
Why Start a Group RESP?
Let’s go back to Claire and her daughter, Josie. Now that Claire understands the benefits of opening an RESP, she wants the peace of mind knowing that her plan can be easily managed, without guessing on whether to invest her money in stocks, bonds or ETFs.
This plays to the very heart of why some families prefer to open a group RESP, as opposed to any other type of RESP. As mentioned earlier, starting a group RESP means you agree to contribute to the plan on a regular schedule. This schedule encourages you to save for education and budget accordingly, some for as little as $9.50 per month.
Additionally, in a group RESP, investment decisions are taken care of for you. You contribute to your plan and your RESP provider takes care of how to invest your money. This set-up is ideal for those who don’t have the time or expertise to manage their money.
In the end, there’s a risk-reward balance when it comes to group RESPs. If others in your group end their plan before it matures, their investment earnings stay in the plan. These extra funds are divided between your child and the other remaining children in the pool. These extra funds can in turn help to offset the fees that you paid. On the other hand, group RESPs are not as flexible as other RESPs when it comes to opting out of them. Under a typical group RESP, you agree to a specific contribution schedule that can last up to 17 years.
Choose a Provider Carefully
When it comes to making any sort of investment decision, knowledge is power — that’s especially the case for group RESPs. Group RESPs are offered by a range of providers, with each provider specifying different contribution schedules, fees and rules.
RESP providers offer experience-backed expertise in matching families with the right type of RESP that will work for them. RESP providers also work with some of the top institutional money managers and are there to provide comprehensive, reliable service.
With that said, because plans differ from provider to provider, it’s important to shop around and take the time to choose a provider that best meets your financial needs and expectations. Before you open an RESP, ask the provider to explain all the fees, limits, penalties, payment options and any other rules associated with the plan. You can also review all the information available in the plan prospectus.
It’s a long road from nursery school to university. It’s also no secret that a post-secondary education can lead to a better future for your child. The most important thing to remember when choosing a plan that is right for you is this: the sooner you start, the more time you’ll have to save.