Hey, Thomas!
Thanks for the tips last week!
I loved the RESP concept
and I will going to open one today!
That is awesome!
Which RESP plan you gonna setup then?
Uhh? What do you mean?
I thought you can just go into a bank
and open the account?
Hey guys! This is Thomas!
Better Mindset | Better Life!
In today’s video,
you will learn the different types of
Registered education savings plan
or RESP for short.
So you can make a sound financial decision
and one thing less to worry in your life
Let's get started!
Last week,
I mentioned that one of the best ways
to prepare for your kids’ education
is through the RESP program.
Having that extra 20% bonus from the government
will help your life much less stressful
Once you decided how much
you want to contribute into the plan,
then the next step is to choose
which type of the resp you want to setup.
There are 3 types of resp that you can consider
There are the individual plans,
family plans and group plans.
They are all common in Canada
and all qualify for the 20%
Canada education savings grant (CESG) matching
and the Canada learning Bond (CLB)
For an individual plan,
there is only one beneficiary on the account
but it can be opened by anyone.
In other words,
this type is perfect for grand parents,
aunts and uncles, family friends
who want to contribute to the plan as a gift.
The benefits of having an individual account
is very simple and straight forward.
It’s easy to see how much you have and
keep track on the withdrawals
when the kids are in post secondary.
Versus the family plan,
This type of resp allows multiple beneficiaries
to be named on the account
but it has to be all related by blood or adoption.
which means this is a plan
for family’s that has 2 or more children.
It’s easier to manage one account
instead of a dozen of individual accounts
under the same family.
When the parents are saving into the family RESP,
the contribution is typically split equally
between the beneficiaries unless instructed.
For example,
Henry and Joanne are sibling
both named as beneficiaries in the family RESP
If the parents contribute $5,000 per year,
normally $2,500 goes to Henry
and $2,500 goes to Joanne.
If Henry decides not to enroll in post secondary,
Henry’s portion including the grant
can be transfer entirely to Joanne.
No matter is an individual or a family resp plan,
the contribution is flexible
meaning you can increase, decrease,
or stop contribution at any time.
Both plans can be offered
by most of the financial institution in Canada
such as banks, insurance companies, credit unions,
investment companies and more.
So, there is a huge variety of investment choices,
from saving accounts, GIC, Mutual Fund,
ETF to stock trading.
Generally speaking,
equity will perform better in the long run.
However, unlike retirement or vacation
which you can delay if the market does not perform well,
there is an agenda to meet when it comes to education.
Take Tom for example.
He has been contributing to resp for 18 years.
And BOOM!
At year 18, there is huge drop in the market
similar to 2008, 2011 or 2020.
and therefore, his portfolio is 30% down this year
and he still needs to take another 25% out
for his child’s first year of college.
Pretty much Tom is facing a double whammy.
The last type is group RESP.
Group Plans can be offered by
scholarship plan dealers only.
Similar to individual plan, it’s for one child only,
and the child does not have to be related by blood
Group plans are often called as pool plans.
They will pool all the plan member’s money and invest.
Majority of the money are invested in a fixed income
which is a low risk steady return.
Since this is a group plan with locked investment,
there are quite a bit of restrictions.
First is about the flexibility.
unlike individual or family plan,
group plan has little flexibility.
You will be asked to commit making regular payments
into the plan over a certain period of time.
For example,
say $2,500 per year for the next 10 years.
And you have to fulfilled
that commitment at all cost.
For any reason that you cannot commit
and forfeit the plan,
your investment earnings remain in the pool
might be distributed amongst the remaining members.
Which means you could lose your original contributions
And there is little flexibility in investment choices as well,
you have no say in how the account is invested
Think of the plan as a long term GIC.
There are membership fees or
some plan providers call it sales charge,
usually you are required to pay off the sales charge
before you actually start putting money into investment.
Typically, that takes 2 to 3 years after the plan started.
But if you can commit to their terms,
you might be able to get the fees back at maturity
depending on the plan carrier.
So despite with all the restrictions,
why group plans still exist?
Mainly because of it’s steady return.
This is a large pooled of money
invested in a fixed income,
the return on the fixed income will be higher
compare to an individual
who walks to a bank with $2500.
According to what I find on google,
One of group resp providers,
the average rate of return
for 10-year time frame is at 4.6%.
back in 2008 and 2011
where the equity market is down 30%,
this group plan yields 5.2% and 7.3%.
It avoids Tom’s scenario I mentioned earlier.
In conclusion, which RESP is right for me then?
You can ask yourself these questions.
How much are you going to contribute to the plan
how is that affecting your current cashflow?
Can you commit that amount
no matter what happens in the future?
What is your investment experience?
Say If all your TFSA and RRSP’s money
are invested in the market,
would you like your RESP
to be something similar or different?
Who is managing your resp’s investment?
Is it some one that you trust or
a random agent waiting for you in the delivery room?
Either a group or non group RESP,
always read the fine print and judge for yourself.
Fees is associated with all types of plan
but it should not scare you away
and choose not to receive
thousands of dollars the government grants.
Take some time to think
about the three questions above
or talk to someone to find out
which plan works for you the best.
If you have questions,
you can leave them down below
Or connect with me through Facebook or email.
This is Thomas!
If you want to learn how money works
and how you want to work with money,
then I will see you next week!
Bye guys!