Choosing a Registered Education Savings Plan (RESP)
April 23, 2014
Considerations for Choosing an RESP
You are the happy parents of a charming baby. Your friends and family surround you and rejoice at your happiness.
However, as life quickly returns to normal, and you realize that you now have the time to look at the new responsibilities brought about by this unfamiliar life, you wonder if you are up to the challenge.
Among the various thoughts which crowd your mind, there is the important question of your child’s education. Although a lot has been said on this subject, reality hits you in the face when you realize that in 2033, it will cost you close to $154,0001 to fund your child’s post-secondary education (if he completes two years of CEGEP and three years of university in Quebec).
In the process, you gain the insight that there is one solution to suit your specific needs: namely, the Registered Education Savings Plan (RESP). The latter, along with the generous government grants it attracts, can increase savings by up to $12,8002 ($9,200 in the case of New Brunswick) per child, based on net family income. Making the decision to set up an RESP for your child seems like a no-brainer.
The hard part now is deciding how to invest the money. What kind of RESPs should be considered? How much funds should be invested? This calls for decisions that have significant consequences.
Determine What Type of RESP Option Will Work Best
There are two types of RESPs: Group and Individual.
Individual non-family plans
First off, Individual non-family plans are products for which there may be only one beneficiary. No blood or adoptive parent ties with the beneficiary are necessary. This means that you are able to invest funds in the plan of a child other than your own.
As the subscriber of this RESP, you get to choose a contribution amount, while complying with the limits imposed by the Income Tax Act, and the timing of educational assistance payments (EAPs) when your designated beneficiary enrolls in an eligible program of post-secondary study. You can also withdraw your capital upon enrollment of the beneficiary in such a program. Additionally, if your beneficiary does not pursue higher education, the plan may be transferred to another designated beneficiary, where the contract permits.
With this type of plan, a subscriber may choose to invest in equities and mutual funds or any other form of investments on his own; however, he also accepts the risk for this self-determined option alone.
Individual family plans
Individual family RESPs can have one or multiple beneficiaries. The latter are designated at plan opening. Afterwards, it is possible to add other beneficiaries.
With this type of family RESP ― and unlike individual non-family plans ― the beneficiary must have blood or adoptive parent ties with the subscriber.
The other conditions under this plan are similar to that of the individual non-family plan (A subscriber may choose to invest in equities and mutual funds or any other form of investments on his own; however, he also accepts the risk for this self-determined option alone.)
As in Individual non-family plans, group plans have only one beneficiary, and no blood or adoptive parent ties are necessary. As is the case with individual non-family plans, if your beneficiary does not pursue higher education, the plan may be transferred to another designated beneficiary, where the contract permits.
The important difference with these plans resides in the fact that your capital is pooled with that of other subscribers. Contributions are established based on the number units (or shares) subscribed and the age of the beneficiary upon contract’s signature. Fund management is performed by the scholarship plan dealer who ensures good return on investment and the highest possible EAPs; as a result, the dealer sees to it that the contributions are invested in quality products and with prudent risk management. In addition, it should be stressed that all foundations have the obligation to reimburse the capital in full (100%) at plan maturity. However, with group plans, if a subscriber decides to terminate his plan before maturity, the amount of income generated by accumulated savings is then redistributed to the other beneficiaries belonging to the same group and whose plans are maintained in effect.
Know the Amount to Invest in an RESP
The best way to know the amount to invest in an RESP is to do a budget. However, it is recommended to establish a reasonable monthly (or annual) contribution amount that matches your investment capacity. Along the way, you'll have the possibility to make single payments or increase your monthly (or annual) contributions.
Ask the Right Questions…
About your RESP provider:
- How many years has your scholarship plan dealer been active in the RESP industry?
- Does your plan dealer apply for the Quebec Education Savings Incentive (QESI), the Canada Education Savings Grant (CESG), the Canada Learning Bond, the additional QESI and the additional CESG?
- Do you know who you do business with? Are your plan dealer and RESP representative authorized to offer such products? (View the AMF's Register of firms and individuals authorized to practice.)
About your funds:
- Can you decide on a contribution amount and schedule for an RESP?
- Will you be required to make investment decisions?
- What are the risks associated with the investment?
- Is there a minimum contribution requirement? If so, what is it (in unit value)?
- What EAP amount entitles you to a unit?
- What happens if you stop making contributions?
- Can you withdraw your money when you need it?
- What happens if you (the subscriber) die?
- Is the reimbursement of your capital 100% guaranteed at plan maturity? Do you recover your contributions/capital in full (100%) at plan maturity? Are sales charges also reimbursed at plan maturity?
About your plan:
- What type of RESP is being offered to you? Group or individual?
- Can you change (from group to individual) plan? If so, under what conditions?
- What fees are applicable (sales charges, management fees, charges for opening files, investment expenses, etc.)?
- What is the duration of the contract?
About the pursuit of a program of education:
- What are the eligible programs of study?
- What is the timeline to request an EAP on behalf of your beneficiary?
- When will you receive EAP payments?
- What happens if your child does not pursue a post-secondary education? Can you recover the investment income? Is a change of beneficiary possible?
1. Calculation based on the basis of the figures provided by the Ministère de l’Éducation, du Loisir et du Sport (MELS), the Ministère de la Famille et des Aînés, Statistics Canada and SMH. Based on 2013 costs, annual increase of 2.2%.
2. The Canada Education Savings Grant (CESG) is equal to 20% to 40%. The lifetime limit is set at $7,200 per beneficiary. Based on net family income. The Quebec Education Savings Incentive (QESI) is equal to 10% to 20%. The lifetime limit is set at $3,600 per beneficiary. Based on net family income. The Canada Learning Bond (CLB) can reach up to $2,000 for a child born after December 31, 2003, from a family who receives the National Child Benefit Supplement. Certain conditions apply. For more details, contact your representative or refer to our prospectus.