One of the most important investments is higher education which has become increasingly expensive. However, as higher education has risen in cost, its significance in the job market has only become more apparent. The good news is that there are resources that families can take advantage of to afford an ever-more important higher education — one of those resources being Registered Education Savings Plans (RESPs).
RESPs are savings plans designed to help people fund the cost of a child’s post-secondary education. It begins with a parent or a grandparent investing in a RESP through regular contributions into the plan. Once the plan is registered it becomes eligible for government grants such as the Canada Education Savings Grant (CESG). Your RESP could also be eligible for other provincial grants. The best part? Taxes on income earned in the plan are deferred until the child – or beneficiary – enrolls in a post-secondary education program and tuition must be paid.
RESPs are an ideal way to help secure the future of your family’s next generation. Receiving a higher education, after all, opens up a host of opportunities that fulfills the growing demand for skills in the Canadian labour market. Now that we agree that RESPs are crucial to help pay for higher education, let’s look at the kind of RESPs you can open for your child. There are three basic types- individual, family and group plans. With a number of misconceptions surrounding group RESPs in particular, let’s explore some of the advantages of opening a group RESP so that you are more informed.
Why are group RESPs misunderstood?
Let’s start with defining group RESPs first. Group RESPs are also known as “pooled” RESPs because they combine the contributions of many investors. Contributions are made according to schedules and are used to buy units in a plan. The plan’s maturity date is established at the time of enrollment and is based on the beneficiary’s birth date. Subscribers are usually required to commit to a contribution schedule (a maximum of 17 years) which may not appeal to everyone but if you are looking for disciplined savings with long-term growth potential, a group RESP may be right for you.
Because of the pooled nature of group RESPs, it’s important for would-be subscribers to do their due diligence into the mechanics of the plans and the track records of organizations that offer them.
It’s also important to understand the fee structure being offered by various group RESP providers. Most group RESPs charge sales fees associated with the number of units purchased when you open a plan. This fee can often be non-refundable and is usually paid with your initial contributions.
Some RESP providers like CST Consultants are transparent about the fees associated with group RESP plans and invest time into sharing details about their fees when you open a CST RESP.
What are the advantages of the investment pool that is a feature of a group RESP?
The way group plans are set up, you agree to invest your contributions, together with those of families who have children born in the same year as your child. The income earned on contributions are then divided among students who are still in the plan at the time of their enrolment in a college, university or other post-secondary education
Why choose a group RESP versus the other alternatives?
Several reasons, largely due to the professionally managed nature of group RESPs. Investments in group RESPs are designed to protect your savings, while generating investment growth. The investment strategy for a group RESP is to ensure that the funds are protected and ready for use when the child heads off to school. More specifically, your principal (contributions less fees) and any government grants are invested in fixed income securities like government and corporate debt securities. Investment income earned by your RESP, meanwhile, can be invested in equity securities including exchange-traded equity securities, in addition to the fixed income securities already mentioned. Each provider may have different investment strategies, so it’s very important to read their prospectus in detail and understand how your money is being invested. After all, the RESP is for your child’s education so why take risks with their future?
Investments in group RESPs are fully managed by professional investment management companies. That means these plans can be a good option if you’re not confident about your investment knowledge or don’t have the time to sufficiently manage your investments.
What should I add to my checklist in reviewing which RESP is best for me?
Here are some good starting points:
- Check how your money will get invested
- What is the minimum amount that you will need to invest in a RESP
- Take time to explore information available on
government grants here
- Look into the fees of the education saving plan you are opening, what they are for and when they are paid.
- Check when you are expected to
contribute and how much.
- Check what post-secondary programs
qualify for RESP funds in each plan.
- Check when and how plan payments
are disbursed.
- Check if you can you change your mind about subscribing once you have started a group RESP and if the provider you have chosen offers any sort of grace period (most group plan providers offer a 60-day cooling period).
Canadian Scholarship Trust Plan is only sold by Prospectus. Investors should read the Prospectus before making an investment decision because it includes important detailed information. You can get copies of the Prospectus from www.cst.org or by calling 1.877.333.RESP(7377).
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