RESP...tell me what it means to me...

November 14, 2005 3:34 PM

CanadaFinancialFilter: What's the best way to invest in an RESP?

My husband and I recently opened a no-fee bank RESP for our son. We plan to use the bank RESP until we have enough money to warrant opening a self-directed RESP. However, we know some people who have gone with "scholarship trust" plans. It sounds like these programs involve a bit of a risk, in that your child may not pursue four years of post-secondary education. My husband and I both have masters degrees, but we recognize that our children may not be interested or even suited to university. We want to make sure that the maximum amount of our contributions/interest/grants will be available for RRSP transfer, cash out or what-have-you, in the event that our children do not pursue post-secondary programs. We don't want our children to feel guilty or pressured about university, even though we think there is a strong likelihood that they will pursue some form of post-secondary education.

Canadian parents...what do you think the best way to invest in an RESP is?

posted by acoutu to education (13 comments total)

However, we know some people who have gone with "scholarship trust" plans. It sounds like these programs involve a bit of a risk, in that your child may not pursue four years of post-secondary education.

I don't know much about this subject in general, but I know several people who have gone this way, only to have to deal with rigid restrictions on how to withdraw the money upon maturity, and/or losing all but the principle upon deferment of school, pursuing a non-qualifying program or simply not going to university. Be careful and read all the fine print.
posted by loquax at 3:59 PM on November 14, 2005

You might want to just put it in a RRSP, then when you withdraw it, use the tax credit on education to offset the taxes you'll pay.
posted by blue_beetle at 5:07 PM on November 14, 2005

I'm talking about money for a child. Adults cannot set up RESPs for themselves. And putting money into an RRSP and pulling it out again just means you get 40% going in and then pay 40% tax coming out. With an RESP, you get 20% grant that goes into the fund.
posted by acoutu at 6:08 PM on November 14, 2005

Get thee to a financial planner. We've done an RESP for our 2 sons, and the details are handled by our financial planner. While I'm unfamiliar with all the nitty gritty (it's been almost 2 years since we set it up), if they decide not to go to school (University or Community College) there are provisions for rolling it into an RRSP (or something along those lines).

The bonus with having our planner deal with this is that when he thinks it's time to make a change to the portfolio, he'll talk to us about his thinking and what direction he thinks we should take. While he hasn't done this with the RESP, he has done this several times with our RRSPs.

I would stay away from the Scholarship plans. A girl I dated in University had one of those and the rules where extremely unflexible (mind you that was 10 years ago). Her brother was going for the "7 year undergrad degree" but had to rush and finish in 6 or he would have lost the remainder of his scholarship.
posted by smcniven at 6:36 PM on November 14, 2005

Self-administered RESPs are more trouble than they're worth, IMO. We have an RESP set up at the Bank of Montreal through their Intuition program (a basket of BMO mutual funds with 4 different risk profiles) and it's fine. I think we've averaged 8% annually over the last 7 years, which is OK. I honestly doubt I could do better, though maybe you could. Self-directed RESPs, like self-directed RRSPs, have explicit fees attached, where canned programs like Intuition make money through the regular mutual fund management fees.

There are dedicated RESP providers, but I never really bothered to look into them. I know nothing about trusts, but the RESP rules are pretty flexible these days and you get the $400 grant annually, so I don't see any way that you could go wrong.

RESPs can be used for virtually any post-secondary education: university, college, or "other educational institution" (CCRA page). I mean, basically the only way your kids can't get the money is if he or she completely drops out and I don't think that's the kind of thing you plan for.

Good luck!
posted by GuyZero at 6:25 AM on November 15, 2005

Go with an RESP, and not one of those scholarship trusts.

With an RESP, the money is yours still, so you can roll it into your RRSPs, or you can change the beneficiary of the plan, etc. If your kids don't attend post secondary education, you'll still be able to get your money plus growth back if you invested in an RESP. In the case of the scholarship trusts, they usually say that if your kid doesn't attend post secondary (and often they have a narrow definition of this) you get nothing because your money gets rolled back into the plan and everyone else gets a little bit more. Certainly you'd like your kids to go to univeristy, but why tie your money up in a way that you can't be guaranteed to get it back?

I do recommend you see a financial planner that can look over your current assests, your future goals, and help you make a plan to get from here to there. They are required to have extensive training in all

(I am not a Financial Planner, but my husband is)
posted by raedyn at 7:07 AM on November 15, 2005

(ps - I'm not a financial planner, but I am a Canadian parent with an RESP for my daughter)

FYI, depending on the year your kids were born (after 2003, IIRC) and your income, you may be entitled to more than the 20% matching.

Budget 2004 doubles [the] matching rate to 40 per cent for the first $500 invested in an RESP by families earning under $35,000.

And it increases the rate to 30 per cent for families between $35,000 and $70,000.(Source scroll to slide 28)
posted by raedyn at 7:24 AM on November 15, 2005

A self-directed RESP is probably your best bet once you've got some money put together in the savings deposit. You can invest it pretty much as you choose, and the beneficiary can be changed if need be. You do, however, need to have the discipline to invest in it regularly (my wife and I each contribute $50 per paycheque into our daughter's RESP).

Bear in mind that university isn't the only thing that an RESP can be used for - it can be used for trade school, apprenticeship programs, community colleges, and pretty much any other form of post-secondary schooling. While it may be uncertain whether your child attends university, it's a safe bet that he/she will attend some form of post-secondary education.
posted by gwenzel at 10:16 AM on November 15, 2005

We're about to set up an RESP for my daughter too, and my research so far has confirmed that an RESP, not scholarship fund, is the way to go. The funds don't seem to have enough advantages to warrant the risk, and many struck me as dodgy.

Piggybacking on your question -- Am I right that our four RESP options are: (1) pay $50/year for a self-directed fund and pick the investments you want; (2) pay $0/year and go with a bank RESP; (3) pay $?? and get a financial planner who will advise and invest in your chosen investments for you; (4) pay $0 and find a mutual fund company willing to set up an RESP for you that consists entirely of their funds.

(I realize mutual fund fees and MER apply in all cases.)

I looked into adding some Franklin Templeton mutual funds to an RESP, but they require you to go through a planner.

Therefore I'm leaning towards setting up a self-directed RESP, since I can do that from home and I'm a terrible procrastinator otherwise. We'd be investing the full $2000/year or whatever it is to get the maximum grant from the feds.
posted by Yogurt at 11:02 AM on November 15, 2005

We have seen a financial planner. I just wanted to make sure that these scholarship trusts were the way I had assessed them. That is, of course, why I had opened the RESP at the bank. Sounds like I made the right choice.

I am aware of all the grants. We had the bank apply for all of them, even though it looks like we're only getting the 20% one. (I had to tell the bank to apply for all of them. They just assumed we didn't qualify. I said I'd rather be rejected than miss out.)

Yogurt...some brokerages (e.g. Scotia McLeod) offer self-directed accounts for $25 a year. You could use mutual funds or other vehicles (trading charge may apply).

I had a "financial planner" (read: mutual fund salesperson) sell me some Franklin Templeton funds for my RRSP. I ended up paying high annual fees, not having online access to my account, terrible and inaccurate advice, high MERs, long-term DSCs, etc. I suggest you go through a bank or discount brokerage instead. We're planning to do a bank RESP until we have enough funds to warrant a self-directed account. Right now, mutual funds provide diversity and the bank doesn't charge for RESPs. We'd have to pay $25 for a self-directed account and, with just $2000 in the account, I'm not wanting to go with ETFs, stocks or other vehicles just yet.
posted by acoutu at 11:52 AM on November 15, 2005

Note: first reference to financial planner above is to the real McCoy.
posted by acoutu at 11:53 AM on November 15, 2005

Thanks for the Scotia McLeod tip, acoutu! That's probably the way we'll go. I live outside town and the online option is much more convenient for us.
posted by Yogurt at 4:20 PM on November 15, 2005

Yogurt, depending on your income, I think one of the government grants gives you an extra $25 toward the cost of an RESP. I don't qualify for it, but maybe you (or someone else reading tis) will.

You might also be able to set up a Scotiabank RESP over the phone. I made many of my RRSP investments this way, when I had them at the bank. (THey're now at ScotiaMcleod, since self-directed makes more sense for me now.)
posted by acoutu at 4:25 PM on November 15, 2005