Contents
RESP 101 A HUGE RED FLAG – That Could Cost You $$$ if You Don’t Know
Hey, Thomas. Thanks for the tips last week. I love the RESP concepts, and I will going to open one today. That is awesome. Which RESP plan you gonna setup then. Huh? What do you mean? I thought you can just go into the bank and open the accounts. Hey guys, this is Thomas, Better Mindsets, Better Life. In today’s video, you will learn the different types of registered education savings plan, or RESP for short. So you can make a sound financial decision and one thing less to worry in your life.
Let’s get started.
Last week I mentioned that one of the best ways to prepare for your kids’ education is through the RESP program. Having that extra 20% bonus from the government’s will help your life much less stressful. Once you decide how much you want to contribute into the plan, then the next step is to choose which type of the R E S P you want to set up.
There are 3 types of R E S P that you can consider. There are the individual plans, family plans, and group plans. They’re all common in Canada and all qualify for the 20% Canada Education savings grant, CESG, matching and the Canada Learning Bond. For an individual plan, there’s only one beneficiary on the accounts, but it can be opened by anyone. In other words, this type is perfect for grandparents, aunts, and uncles, family friends who wants to contribute to the plan as gifts.
The benefits of having an individual account is very simple and straightforward. It’s easy to see how much you have and keep track of the withdrawal when the kids are in post secondary versus the family plan. This type of the R E S P allows multiple beneficiaries to be named on the accounts, but it has to be all related by blood or adoption, which means this is a plan for families that has two or more children.
Consolidate your accounts for easier management
It’s easier to manage one account instead of dozens of individual accounts under the same family. When the parents are saving into the family RESP plan, the contribution is typically split equally between the beneficiaries and less instructed. For example, Harry and Joanne are siblings and both named as beneficiaries in the RESP. If the parents contribute $5,000 per year, normally 2,500 goes to Henry and $2,500 goes to Joan. If Henry decides not to enroll in post secondary, Henry’s portion, including the grants can be transferred entirely to Joan.
No matter is an individual or a family RESP plan, the contribution is flexible, meaning you can increase decrease or stop contribution at any time. Both plans can be offered by most of the financial institution in Canada, such as banks, insurance companies, credit unions, investment companies, and more. So there’s a huge variety of investment choices from saving accounts, GIC mutual fund, etf to stock trading, trading. Generally speaking equity will perform better in the long run. However, unlike retirement or vacation, which you can delay if the market does not perform well, there’s an agenda to meet when it comes to education.
Take Tom for example, he has been contributing to RESP for the past 18 years, and boom, at year 18, there’s a huge drop in the market similar to 2008, 2011, or 2020, and therefore his portfolio is 30% down this year, but he still needs to take another 25% outs for his child. First year of college, pretty much Tom is facing a double whammy.
RESP Information and Advice by Thomas C Chan
The last type is group, R E S P. Group plans can be offered by scholarship plans dealers only. Similar to individual plan is for one child only, and the child does not have to be related by blood. Group plans are often called as pool plans. They will pool all the plan members money and invest. Majority of the money are usually invest in a fixed income, which is a low risk steady return. Since this is a group plan with locked investment, there are quite a bit of restrictions.
First is about the flexibility. Unlike individual or family plan, group plans has little flexibility. You’ll be asked to commit making regular payments into the plan over a certain period of time. For example, say $2,500 per year for the next 10 years, and you have to fulfill that commitment at all cost. For any reasons that you cannot commit and fulfill the plan, your investment earnings remain in the pool, might be distributed among the remaining members.
Which means you could lose your original contributions, and there’s little flexibility in investment choices as well, you have no say in how the account is invested. Think of the plan as a long term gic. There are the membership fees or some plan providers call it sales charge. Usually you’re required to pay off the sales charge before you actually start putting money into the investment. Typically, that takes two to three years after the plan started, but if you can commit to their terms, you might be able to get the fees back and maturity depending on the plan carrier.
Safer option, but arguably worse for all
So despite with all the restrictions why group plan still exists. Mainly because of a steady return. Since this is a large pooled of money invested in a fixed income, the return on the fixed income will be higher compared to an individual who walks to the bank with $2,500. According to what I find on Google, one of the group RESP providers, the average rate of return for the 10 year timeframe is at 4.6%.
Even back in 2000 eights and 2011, where the equity markets is down 30%, this group plan still yield 5.2 and 7.3% It avoids Tom’s scenario that I mentioned earlier. So in conclusion, which R E S P is right for me, then you can ask yourself the following questions, How much are you going to contribute to the plan and how is that affecting your current cashflow? Can you commit that amount no matter what happens in the future? What is your investment experience? Say if all your TFSA and RRSPs money are invested in the market,
Would you like your R E S P to be something similar or different? And who is managing your RESP’s investment as it someone that you trust or a random agent waiting for you in the delivery room? Neither a group or non-group R E S P, always read the fine prints and judge for yourself. Fees is associated with all types of plans, but it should not scare you away and choose not to receive thousands of dollars of the government grants.
Thank you for listening!
Take some time to think about the three questions above or talk to someone to find out which plan works for you the best. If you have questions, you can leave them down below or connect with me through Facebook or email. This is Thomas. If you want to learn how money works and how you want to work with money, then I will see you next week. Bye guys.
