Quite possibly one of the greatest things you can do for your children’s future is to open a Registered Education Savings Plan (RESP) for them. This specialized registered account carries several benefits that ultimately help build money towards your child’s college education.
Such benefits include being entirely tax free and the ability to receive government education grants to boost your balance. Because the cost of college is always rising it only makes logical sense to save early and often using every benefit along the way.
That being said there has been a lot of ink, good and bad, penned about group RESPs. Sadly, not all types of RESPs are created equal and so being aware of this type, along with diligent research, will continue to be important to ensure your money is being invested wisely.
But what exactly are group RESPs? Well, in a nutshell, they are like any other RESP but it works in a subscription basis whereby every investor pools their resources. The most popular ones include Heritage Education Fund and the Canadian Scholarship Trust.
By agreeing to take part in a group RESP you are obligated to routinely put in a regular amount until its maturity. This contribution is combined with others contributions in the plan. And if you stay in until completion you receive a portion of the accumulated funds.
The problem arises when you drop out early. Because many of these types of RESPs have very high enrollment fees (it can be over $1,000) there is a high risk that leaving the plan early will cost you this entire enrollment fee, and you will be dinged with large penalties on top of it — all of which that could wipe out any gains you may have received.
Sadly many group RESPs gloss over the risks in their marketing intentionally. It became so bad the Ontario Securities Commission wrote a disturbing report 10 years ago about how these group RESPs function. There have been some moderate improvements, but the industry as a whole is still looked on with suspicion. Because many households are so eager to begin saving for their child’s educational future they are less likely to read the fine details, which these group plans organizers are counting on when preying on them.
Thankfully there are better options. One of which is to open your own RESP with a discount broker or at your local bank. For me, Questrade has always been a great option. There is no need to look for a group RESP provider. It’s all about control and having more of it in your hands will always keep you in the driver’s seat when it comes to making your money grow. You won’t have to worry about steep penalties when you forget or can’t make timely contributions.
That being said, no other great truism can uttered than to always do a little research. RESPs may come with varying options but the best may just be to open your own account.