Learning about RESPs

Bruce Sellery offers his advice on the most cost effective way to take advantage of the Registered Education Savings Plan.

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Question

I have three agents competing for my RESP registration. I have some idea of how I should decide which one to go with, but I don’t like any of my options so far. How do I make the best decision, or am I better off saving their money in an account for now?

Answer

Don’t go with any of the three agents. Just go to your bank, credit union or financial planning firm and set up an RESP there. Simple as that.

I know this response may come across as abrupt, but if you don’t like your options then you need to try a different approach. But I think it would also be beneficial for you to reframe your question. Instead of asking how to choose between three scholarship trusts—options you don’t like—I’d ask a different question: What is the simplest, most cost effective way to take advantage of the Registered Education Savings Plan?

The answer is this: go to your bank, open up an RESP account, set up an automatic withdrawal from your chequing account every month, then invest the proceeds in a low cost mutual fund. Ta-dah. Done.

There are three main reasons to go this route:

  1. Simplicity: An RESP is simply a container for your investments, like an RRSP. When you put money into that container you qualify for a government grant of 20% or up to $500 per child per year. At a bank, once your money is in the account you can do all sorts of things with it. The agents you’ve been talking to work for scholarship trusts and they are selling a more complicated product. There are rules about withdrawals and the contribution schedule—rules that you won’t have to deal with at your bank. Read more about an “Interesting Report on RESPs” that outlines some of the other issues with scholarship trusts.
  2. Cost: The fees you pay to invest your money can have a profound impact on your returns over time. This goes for any type of investing, not just RESPs. And that fact is scholarship trusts cost more. Jason Heath is a CFP and fee-only financial planner at Objective Financial Partners explains: “There are higher overhead costs to run the company. The salespeople need to get compensated and the additional service they provide—which may or may not be beneficial to the average parent—are expensive.”
  3. Performance: In addition to the impact of fees on investment performance, scholarship trusts generally focus on fixed income. While that implies that the investments are safer, it also means that returns are likely to be lower over time than if you had some exposure to the stock market.

The second part of your question asked whether you should just “save their money in an account for now.” The answer to that is an emphatic no. Get moving on this now, otherwise you’ll be missing out on that juicy government grant and the magic of compound interest.

And don’t worry—there is nothing to be intimidated by in setting up an RESP at your bank. Click here for a step-by-step guide on the “smart way to save for school.”

ask@moneysense.ca

4 comments on “Learning about RESPs

  1. Really? That is the easiest way? Will banks take care of all the grants I am entitled to? Will banks share the info about my ROI? What are the fees in total in 18 years I have account with them?

    This article is misleading and it is talking just from one point of view. Looks like the author has interest in promoting banks as RESP providers. I am really dissapointed with this article.

    Reply

  2. You have to be kidding me !!!!!! You have not stated who these other agents are, or the reason this person did not chose one of them. Why would you believe the banks would do a better job based on little to no information . I agree with the comment above that it is misleading and very dissapointed with the narrow minded response !

    Reply

  3. Thanks for your comment. To answer your questions, rhetorical or not…

    Yes, the banks will take care of the grants.

    Yes, you can find out how your investments are performing. That info might come from the banks, but if you buy a mutual fund, you'd look up the returns on that fund specifically.

    And regarding fees, you can ask that question directly of the bank. It mostly depends on what product you choose to put your money into – a low fee index fund will have an MER (management expense ratio) of about 1% or so. Fees to have the account open are nominal, but ask your bank for specifics.

    I have no interest in promoting the banks. However, I do have a passionate interest in people getting a handle on their money so they can live the life they want. Simply, and inexpensively.

    Reply

  4. Be careful with resp's as the commentator stated they are like your rrsp Just hope and pray when your youngster graduates that the stock mutual fund market hasn't crashed
    You will get your money back that's about it. BTDT Go with a Bank or trust company, those "other companies are in it for them selves. SIL lost half of her investment because she had fallen behind in the contribution with no way to catch up.
    There still is some pretty shady companies out their

    Reply

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