Learning about RESPs - MoneySense

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

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