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Back to School Savings: Fine Tuning Your RESP

By Michael Callahan | August 30, 2019

Question. Hi, my partner and I currently have RESPs opened for our two children, and we contribute $200 per month for each child. Although my kids are still in elementary school and have quite some time before college or university, I always get nervous when I think about the costs (and especially when they go back to school after the summer). Do you have any tips to help me make sure I’m on the right track in terms of saving for my children’s education?

Answer. It’s back to school season, which is a great time to review your education savings plan. In general, you appear to be on the right track – The Registered Education Savings Plan (RESP) is the best way to approach education savings.

However, the RESP is just an account. What about the type of RESP account? What about the investment products that are in the account? What rate of return are you earning, and how much are you paying in fees?

Let’s take a closer look at some of these points, and some potential opportunities for fine tuning your RESP.

Type of RESP Account

There are 4 different types of RESP plans, including the individual (non-family) plan, family plan, specified plan, and group plan.

For most people, two of these can be ruled out, as a specified plan is a special type of individual (non-family) RESP applicable only to those who are disabled and eligible to receive the disability tax credit (DTC), and a group plan should be avoided at all cost regardless of your situation – see our previous post about the dangers of group RESP plans.

That leaves us to consider the merits of individual and family plans. In a situation with two (or more) children, it may be more advantageous to open a family plan rather than separate individual plans. With a family plan, you can have multiple beneficiaries (children) in the same plan, provided that each beneficiary (child) is related, either by blood or adoption, to the person who opens the plan (the subscriber). Note that the children do not have to be related to each other.

Keep in mind that, the lifetime RESP contribution limit is $50,000 per beneficiary (child), not per account. So, for example, in a family plan with two beneficiaries, you could contribute a total of $100,000 to the plan. The main advantage here is that, if one child decides not to pursue postsecondary education, you can still use the money in the plan for the child who does. And even if you’ve already opened individual RESP plans, you can still open a new family plan, and combine both existing individual RESPs into a new single family plan. Just be careful to adhere to the lifetime contribution limit of $50,000 per beneficiary, as any over-contribution will be penalized.

Fees and Rate of Return

The fees you pay, and the rate of return you earn, will be determined by the investment products you hold in your account. Keep in mind that virtually all investment products have fees, and some are worth paying – as long as you’re getting good value, and getting what you’re paying for. However, the amount of money that you lose to fees has a compounding effect, so what may seem insignificant in the short term can actually prove to be quite substantial over time.

If you don’t know how much your investment fees are, don’t beat yourself up too much – most investors have no idea about the investment fees they pay. Additionally, many advisors are less than forthcoming when it comes to transparency of fees and charges, so you often have to do a little bit of homework to understand the fees you’re paying. Want some help figuring out how much you’re paying in fees? We’d be happy to crunch the numbers for you! Click here to get a free report on your mutual fund fees, and find out how much you can save.

Why are fees so important? Remember, investments with higher costs have to overcome the fees they charge, and as a result, the performance of high-cost investments tends to lag that of lower-cost investments. In fact, Morningstar’s data shows that fees are a top (inverse) predictor of investment performance – the higher the fee, the lower the performance.

Free Money! Education Grants and Bonds

As an incentive for Canadians to save for their children’s’ post-secondary education, the Government of Canada has developed two key programs: the Canada Education Savings Grant (CESG), and the Canada Learning Bond (CLB).

CESG – Canada Education Savings Grant

According to the Government of Canada, “No matter what your family income is, ESDC pays an amount of Canada Education Savings Grant (basic CESG) of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.” Note that the Government will also pay an additional CESG (ACESG) amount for low income families. Additional information about the CESG can be found on the Government of Canada’s CESG webpage.

CLB – Canada Learning Bond

The Canada Learning Bond (CLB) is specifically for children from low-income families. The Government of Canada will contribute up to a total of $2,000 to an RESP for an eligible child, which includes $500 for the first year of eligibility, and $100 each year the child continues to be eligible (up to and including the benefit year in which they turn 15). Additional information about the CLB can be found on the Government of Canada’s CLB webpage.

In addition to the CESG and CLB programs, some provinces also have education savings initiative programs, including:

As we can see, depending on your province of residence, you may be eligible for additional programs, so make sure you’re taking full advantage of any grant and savings that are applicable to you!

Back to School Bottom Line

In the world of investing, there are many things beyond our control. However, opening the right kind of account, and choosing investment products with low fees are both entirely within your control. RESPs are a great way to help save for a child’s education, but as we’ve discussed, just because you have an account open doesn’t necessarily mean you’re on the right track.

Which type or RESP is best for you? And what kind of fees are you paying? If you’d like some help figuring that out, or if you have any other questions about education savings or any of our other products and services at ModernAdvisor, just ask us.

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Michael Callahan