RESP 101: how to choose the plan that’s right for you
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When it comes to setting up a Registered Education Savings Plan, it’s important to be fully aware of your options.
For example, out of the three types of RESPs to choose from (Individual, Family or Group), two come with a healthy list of advantages. While one type features costly drawbacks that have surprised many Canadians.
To help you choose the right plan (and avoid potential pitfalls), here’s what you need to know about the three types of RESPs:
Individual Plan
This is the most flexible option and perfect for setting up post-secondary savings for an only child—or if you have multiple children, but prefer to set up an individual plan for each.
Advantages:
- The child you’re saving for (‘the beneficiary’) doesn’t have to be related to you by blood or adoption. The government doesn’t consider nieces and nephews ‘blood relatives’, the individual plan allows aunts and uncles, as well as friends of the family, to open an RESP.
- You can change the beneficiary at any age. So if you have an individual plan for each of your children and only one decides to attend grad school, you can transfer the other individual plans to that child (the one attending grad school)—even if they are 30 years of age.
- You can combine individual plans into a family plan, as long as all of the beneficiaries (attached to those individual plans) are related to you (‘the subscriber’) by blood or adoption.
- You can choose the type of investments and how much money you want to contribute and how often (unlike a group plan—see below).
Potential drawbacks:
- If you were to change the beneficiary to a child who isn’t related to you by blood or adoption, you would have to pay back any CESG and CLB (Canada Learning Bond) money.
Family Plan
One or more children can receive the savings from this plan, as long as they are ‘related’ to you. This means they can be your children, stepchildren, or grandchildren (by blood or adoption).
Advantages:
- Adding beneficiaries (with every child that is born) requires less paperwork than creating a new individual plan.
- Money within the plan can be shared between children. CESG can also be shared between children within the plan up to a maximum of $7,200 per child.
- Interest income or capital gains can be shared by the number of children/beneficiaries in the plan.
- Similar to an individual plan, you can make your own investment choices and set the amount of money you contribute.
Potential drawbacks:
- All beneficiaries must be related by blood or adoption
- All beneficiaries must be under the age of 21 when named to the plan (unlike individual plans, which have no age restrictions).
- Contributions can only be made until a beneficiary turns 31—or 31 years after the plan was created (whichever occurs first).
- If there is a larger age difference between your children, the 31-year limit can restrict contributions for the youngest child. Let’s say your oldest child is now 10 and the RESP was created when they were born. If you add your youngest child at age 1, you would only be able to contribute on their behalf until age 21 (when your oldest child is 31). In which case, you may want to consider setting up individual plans.
- All contributions to the plan must be made in the name of a specific beneficiary. If this is not done, the financial institution may divide funds equally among all beneficiaries (of the plan) or allocate the entire amount to one child— causing confusion and potentially lost government grant payments.
Group Plan
Also known as a scholarship or ‘pooled’ plan (due to fact it ‘pools’ the contributions of many investors), this is the plan to be cautious of.
Advantages:
- You don’t need to be related to the beneficiary.
- When the plan matures, the beneficiary usually shares in the pooled earnings of investors with children of the same age.
- If other people leave the plan early, you could receive a share of their earnings.
Potential drawbacks:
- Money is typically invested in low-risk investments and doesn’t give you the ability to choose what is held in this plan (unlike individual and family plans).
- Requires minimum contribution amounts at predetermined (regular) intervals. Sustaining those regular payments could become challenging should you find yourself faced with a sudden financial emergency (i.e. job disruptions/loss, withdrawal of services, etc.). If you end up missing a contribution, you may then have to pay a penalty—plus interest, just to stay in the plan.
- If for any reason you have to leave the plan early, any gains on your contributions would then go to the other plan members. In which case, there is a possibility you would receive far less than what you originally put in (because of the fees and sales charges typically associated with these plans).
- If your child does not begin post-secondary education at the same time as the rest of the group, the earnings you receive from the plan may be affected.
- Your plan could also be terminated without notice and you may have to give up your investment earnings.
Educators Financial Group offers both Individual and Family RESP plans.
Lower fees. No sales commissions or expensive group RESPs. At Educators Financial Group, we put more of your hard-earned money towards your savings goals.
That’s because as an organization that exclusively serves education members (and their families), we believe in the importance of higher learning. No matter where you are on the pay grid or what your pension income is in retirement—we can provide you with the right financial plan to suit your specific needs, goals, and budget.
Have one of our financial specialists reach out to you.
How much will you need to save for your child’s post-secondary education costs? Crunch the numbers using our RESP calculator.
Sources:
https://www.cbc.ca/news/canada/calgary/group-resp-warning-fees-1.5257810
https://globalnews.ca/news/4770899/group-resps-couple-lost-11k-fees/
