Registered Education Savings Plans have been around for about forty years? You’d think with all that history we’d have a better understanding of how they work. And with the free money the government is willing to throw at parents to encourage them to save, you’d think there’d be more people participating.
So why do so few parents open up plans and get busy saving for their kids? And what is it exactly about RESPs that leave parents’ eyes glazing over?
In principle, saving for school is a simple concept. You open up an account, you stick some money in the account, that money is invested in some way (interest, dividends, capital gains) and grows. When the time comes you take the money out. Easy-peasy.
Step one is to pick the right RESP plan. If you choose a group RESP over a family or individual RESP, it’s a little like putting all your golf balls into a cart and shoving them towards the hole. The cart might make it to the green, but it’s just as likely to end up in the man-made lake; your money is sunk.
From high administration fees to penalties for early withdrawal, group RESPs have come under the gun for being far less flexible than bank-administered individual or family RESPs. When you buy a group RESP – also called scholarship trusts – you’re signing a very, very long contract. If you sign up to make $65 a month payments, you must make those payments every single month or risk being forced off the course and saying buh-bye to most, if not all, of your money!
Not so with an individual or family RESP. Those options let you decide when and how much to contribute to your child’s RESP, as long as you stay within the rules. Need to suspend payments because you’ve gone off on maternity leave. No prob. Want to put off payments while you finish up your degree. You can. Plan to pay off those credit cards first and then get focused on saving for school. With an individual or family plan RESP, you have that flexibility.
Step two is to choose the right investments. From GICs to bonds, mutual funds and individual stocks, there are heaps of options from which you can choose to make the money you’re socking away grow.
The more return you earn on the money you invested, the more the RESP will grow. The earlier you start investing the money, the more the RESP will grow. Obvious, right? But what does that actually mean?
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Start early enough and you don’t have to chase returns by investing in options you’re not comfortable with. Start later and you may have to take more risks to build up the pool of funds Little Susie will need for school. But taking risks beyond those you’re comfortable with, and choosing investments that you don’t understand, mean you may make the course a much tougher play.
If you’re a conservative investor, don’t let anyone talk you into buying something that keeps you up at night. Sure, there are investments that may produce higher returns. But if you’re losing sleep the whole time, it’ll feel like standing in a sand trap swinging wildly and getting nowhere.
As kids get closer to needing to use the money, you have less time for the investment portfolio in the RESP to recover so you need to adjust your holdings. By age 8 or 9, the investment time horizon for the RESP portfolio will have shortened to 10 years or less, so you’re out of equities and into fixed income options that ensure the money is there when it’s time to head off to school.
RESPs are the single best way to save for a child’s future educational needs. Never mind the naysayers or the blah blah blah about TFSAs or other options. No other account gives you an automatic 20% return on your savings just for making a deposit. That’s a guaranteed return you should not ignore.