RESP?

I’m getting to the stage in my life where I have to start considering kids into my life plan. How will kids fit into the financial picture? How will I teach my kids proper financial values? How will I help pay for their education?

The last question, “How will I help pay for their education” is what we’re going to discuss today. I’m not saying that I plan on footing the entire University/College bill, as I paid for my own, but I would like to be able to help my children if they need it. I guess the only way to ensure that money is available when the time comes is to save for it.

In Canada, this naturally leads us to the Registered Education Savings Plan (RESP). The RESP is a government incentive for parents to save for post secondary education for their children.

How RESPs work:

  • Unlike an RRSP, with an RESP, there is no tax deduction on the contributions. You do, however, get tax free growth in your RESP portfolio.
  • The RESP account can grow tax free and taxed in the hands of your lower income child when it comes time for University. Contributions can be withdrawn tax free (at any time) since they are paid with after tax dollars.
  • Maximum contribution is $4000 annually New rules state that there is no maximum annual contribution limit only the lifetime max (21 years) of $50,000.
  • CESG: Contributions up to $2500 annually are eligible for the Canadian Education Savings Grant (CESG). The CESG will give you an extra 20% on your contributions (up to $500 CESG annually).
  • Enhanced CESG: Low income families (<$36,378) are eligible for up to $600 in CESG annually (extra 20% on the first $500 in contributions). If your family income is between $36,378 and $72,756, you are eligible for up to $550 CESG annually (extra 10% on the first $500 in contributions).
  • If there is unused grant room from previous years, you are eligible for up to $1,000 in CESG for that year.
  • There is a lifetime max CESG of $7,200 per beneficiary/child. Caveat: If your child does not go to University, the CESG must be repaid to the govt.
  • RESP funds can be transferred to an RRSP account (max $50k) if not utilized after it’s maximum lifespan.

What I like about RESP’s:

  • The CESG, which would give us a 20% increase on our RESP contribution / year of up to $2,500 ($500 CESG). Ie. A $2,500 contribution would be topped up with a $500 government “gift” giving us $3,000 for that year.
  • Tax free growth – I could mix up the portfolio with fixed income products and not worry about the 100% taxation of interest income.
  • Ability to transfer the portfolio into my RRSP in case my child/chlidren do not go to University (not if I can help it ;)).

What I don’t like about RESP’s:

  • If my child/children do NOT go to University/College (or other qualified educational institutions), I am limited to transferring $50k of the RESP earnings/growth to my RRSP provided that I have the contribution room. If I don’t have the room at the time, I’m assuming that the remaining will have to be withdrawn as INCOME. Which means a 20% penalty AND taxed at my marginal rate! Note that the capital can be withdrawn at any time without taxation.
  • On top of the taxation, I would be forced to pay back all CESG’s given. So assuming that I receive the lifetime max of $7200, that would mean I would have to pay: $7200 + 20% penalty (on growth) + income tax (on growth). Ouch.

The chance that the beneficiary will not go to University has grave tax consequences when it comes to an RESP. Perhaps a better solution would be to open a separate non registered account and invest in dividend paying stocks. At least then, if the child decides against post secondary schooling, you’ll have a nice portfolio to boot.

There are more details regarding the RESP on the Scotia bank RESP basics page.

Update Jan 19, 2007: According to a reader comment, the RESP is the best way to go if you are planning on saving for your child’s educational future. Reason being is that if your household has a fairly high income with education as a high priority, there is a HIGH probability (>75%) that your child/children are going to participate in post secondary education of SOME sort. Also, if your child does NOT take post secondary education, only the GROWTH is taxable which can be transferred to your RRSP.

Update March 2010: Check out The RESP Book (link) written by a fellow Canadian Personal Finance Blogger.  It is one of the only books written on RESP’s and explains all the ins and outs in an easy to understand manner.  Check out my RESP Book review.

Any body out there using the RESP system right now? What do you think of the program? What strategies do you use to maximize the program?

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FT,

I’m currently using a RESP for the little one. So far it’s all great. I also have the benifit of my wife has no RRSP’s in her name, meaning she will have enough room to take the entire transfer if the little one doesn’t go to university.

CD

can one open an RESP for future kids? I mean I don’t have any offspring at the moment, but can I start planning early? Do you know?

I don’t think you’d have to worry about having a huge amount of RRSP space since you’d only have to transfer the amount of growth. Don’t quote me on this, but why would the initial contribution that was taxed previously be subject to double taxation?

I use two separate RESP accounts, one for each of my two children. The first one is now 5 years old, opened when my daughter was born through a RESP company. They charge huge fees and it grows at a normal safe rate. I would recommend if you know how to tie your shoes and not drool all over yourself you should set the RESP yourself.

The other I’m still in the process of setting up to use TD’s E-Funds for their low MERs and few fees. This one is for my Son and although I started a little late I’m confident that this one will beat the one through the company noted above.

When my kids get older and decide they don’t want to go to school, I’ll just use the tax penalty as a guilt trip on my kids to go to school, or make them pay it using the ‘I put this money away for you, if you want the government to take it then you’ll be reimbursing me for it’.

I know . . . I’m a cold hearted evil father, but I’ll be damned if I let them grow up with no financial sense or proper schooling. Plus this way they’ll just say “Well, I guess I’ll just go to school then” and my job here is done.

CAD$: As far as I am aware you cannot open an RESP until you have children. In order to open one I believe you need a SIN number.

Traciatim: I would suggest you look into transferring your first RESP account to your TD one and create what they call a family RESP. This way both of the kids contributions grow together and you still receive grant money for both.

Ryan

A question I’m asking on my blog today: is it better to setup one RESP account for two children (which means waiting to contribute until you have a second child). I give more details in the blog, but basically this was recommended by a financial adviser!

Ryan, that would be a cool idea except for the fact that RESP companies have their plans in such a way that there is a huge penalty (in my case I lose $2100 of plan fees) to close the plan. How it works is when you open the plan your first contributions pay the fees for it, and these fees get refunded upon successful completion. I can’t quite remember since I was a little younger and a lot less financially intelligent, but I think I had to sign in blood too.

I don’t really like the group plans, as you can probably tell. The bottom line though is that both my kids will be better off than I was when I graduated. Though I probably won’t be saving quite enough to pay for their schooling (more like half) at least I know I have helped get them started on their way to a successful future.

FT,

Sorry it took a while to get back to your question.

Our RESP is through RBC and it a family plan (yes you can set one up with a child). Currently I have everything going into the RBC Dividend Fund. It’s got a good return since I’ve been in it, so I’m happy. I’ll change over to some more stable investments as the little one grows up.

In regard to the comment about starting a RESP prior to kids. No you can’t, but you could start saving in a taxable account and then after the kid is born move the cash over to the RESP to max out the growth of the account in the first year.

CD

We set up an RESP for our little one pretty much as soon as we were able to do so – when our daughter was only 2 months old. We would have set it up sooner, but we had to get a birth certificate and SIN card for her first. She’s now reaching her second birthday, the the account already has over $6500 in it.

An RESP is how the government encourages people to save for their children’s education. They do this by making the account grow tax-free, and by giving away free money (CESG grant money), albeit with strings attached.

If your child doesn’t use the money for their education, then you have to give the free money back. The 20% penalty off-sets the fact that you’ve received around twenty years of tax-free compounding.

I don’t think it’s much to worry about, though. Right now, how many people do you know that don’t pursue ANY form of higher education? Sure, not everybody goes to university, but most people will go to college, trade school, pursue an apprenticeship, go to hairstylist school, or any number of other opportunities that ALL COUNT as “qualifying educational programs” under the RESP rules.

The chances of your children never pursuing any schooling after high school are slim, especially if they are brought up in a family where education is a high priority (families that invest in RESPs tend to put a high priority on education).

If you want stats, the best place to go is StatsCan (your tax dollars pay for their work, so you might as well take advantage of it): http://www.statcan.ca/bsolc/english/bsolc?catno=11F0019MIE2005243

Approximately 77% of 18-24 year-olds from high-income households were attending post-secondary education when the survey was completed. I suspect that the number of children from high-income households who will attend post-secondary education at some point is higher than 77%, since many 18- and 19-year olds will take some form of schooling when they reach age 20 or 21. An RESP can remain open for 26 years, so you can wait a few years if you child doesn’t attend post-secondary right after high school.

If you make a contribution to an RESP, you are doing so with after-tax dollars (since the money gets reported on your income tax when you earn it). Those contributions are NEVER taxed again, whether the money is used by the child for post-secondary education or is withdrawn from the plan by the subscriber. It’s only taxed once.

After contributing for a while, an RESP is made up of:
1) Your original contribution amounts
2) Government grant money
3) Investment income earned on 1) and 2)

When the child(ren) go to post-secondary education, the only amounts subject to taxation in the child’s name are #2 and #3.

If the child(ren) don’t go on to post-secondary education, #2 has to be returned to the government in full, and #3 can be returned to the subscriber as an Accumulated Income Payment (AIP). The AIP is taxed as regular income, plus the extra 20% tax, but the original contribution amounts (#1) do not get include in the AIP.

Info on RESPs and taxation is here (from the Canada Revenue Agency):
http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-e.html#P233_16720

Bottom line – if you want to save for your children’s education, an RESP is the way to do it.

One telling statistic that I came across on the Statistics Canada web site is that families that are going to put away savings for their children’s education (in an RESP or otherwise) will typically start doing so before the child is one year old. Families that don’t save for post-secondary education by the time the child turns one usually won’t start at all when the child gets older.

One cool thing about RESPs (among many others) is that if your child chooses not to pursue Post Secondary education, you only have to return the grant, not the interest it earned.

http://www.hrsdc.gc.ca/en/hip/lld/cesg/publicsection/faqs_resp.shtml

Bob, it’s true that you don’t have to return the interest that was earned on the grant money, but it’s fully taxable as income when you withdraw it, plus there is a 20% additional tax.

It’s still a good deal, IMHO, because the 20-plus years of compound growth should easily compensate for the 20% extra tax you’d have to pay.

As noted above, the chances of somebody not pursuing some form of post-secondary education are pretty slim. It’s hard to get any sort of career with nothing but a high school education.

Does anyone know how they limit your spending with the education savings? Like, if I saved $80k for my son, but he needed just $40k for university, does the government check to see that he spends the rest on university? How do they know where it is going?

The government doesn’t really care where the money is going, but there is a limit of $5000 that can be paid to a beneficiary once they qualify to receive an EAP (Educational Assistance Payment), but after the student has been enrolled for at least 13 weeks, there is no limit to the amount that can be paid to the student as an EAP.

The EAP money is intended to be used for all expenses related to schooling, not just tuition. It can (and is intended to) be used for books, housing, and other living expenses while in school.

The EAP includes the growth within the RESP along with the government grant money, and counts as income for the student in the year it’s paid to him/her.

More info is here:

http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-e.html#P221_13631

I’m a little late to the discussion but I just set up my resp last week.
Lot’s of good info in these comments – 3 comments/ideas I’d like to add:

1 – The grants are given from the government to the student and you (the subscriber) are really only holding them in trust (so to speak) so if the kid doesn’t go to school you really haven’t lost anything when the grants disappear.
2 – The 20% tax on the growth on top of the income tax certainly sucks but as I’ve told a couple of friends, if you contribute a sum of $$ to someone’s education fund then how much of that $$ are you expecting back? Of course you wouldn’t be expecting anything because it’s for the education. So if they don’t go to school and you end up getting your contributions plus part of the growth back then you’re a lot further ahead financially than if they go to school. How to deal with the unemployed offspring who won’t move out of your basement is another story… :)
3 – As George mentioned there is a limit on the withdrawals in the first 13 weeks but after that you can clean out the account so even if your kid doesn’t want to go to school then one option is to convince him/her to attend long enough to get the money out of the account. Doing this would make the withdrawal taxable in the hands of the “student” so splitting it over the year end would help increase the net amount. Depending on your tax situation it might be better for the subscriber to just collapse the plan and pay the taxes themself. I’m hoping to be retired when my son is around 22 so even if he doesn’t go to school I can keep the plan open for a few years (you can keep it open until age 25) and then collapse it in a year when I don’t have any other income. This would reduce the income tax on the the growth (but not the 20% tax) Another thing to think about is that since you can contribute the AIP (growth) to your rrsp and completely avoid (not just defer) the 20% tax and if you don’t normally have any rsp room then you could potentially start creating some by undercontributing to your rsp a few years before the child heads off to school – I’m thinking that if a kid decides not to go school you might get some warnings signs a few years in advance.

Anyways, sorry for the lengthy post but my conclusion is that you can’t lose with this plan!

Some people don’t do RESP just because they want to get OSAP which may only need to pay back in half.

OSAP (or other student loan programs) don’t always get reduced, and they often result in crippling amounts of debt for young adults when they graduate university. The average student debt load right now is around $20,000! I’d rather have the money available for my children so that they can pay for their education without worrying about huge loans to pay back when they graduate.

Does having more assets (ie resp) mean that osap is harder to get?

Yes, having assets such as an RESP available to pay for an educational program reduces the amount of money available from student loans. The logic is that a student with RESPs (or other assets) available to put toward their education isn’t in need of student loans (or, at least, doesn’t need as much loan funding).

Student loans can be a good bargain, IF the interest rate is reasonable and IF the government “writes off” a portion of the loaned amount. It’s not possible at all to predict either of those things 15-20 years into the future. Having funds in an RESP guarantees that funding will be available for the student’s education, regardless of changes in government policy or interest rates. And the student doesn’t get saddled with any debt after graduating, if they are able to use funds from an RESP for their education.

I “only” had $5k in debt when I graduated but between unemployment and finally getting a crappy job – it took a long time to pay it off. Sad thing is I really didn’t need the loan and it went mostly for beer etc.

[…] February FrugalTrader05:00 amAdd comment I was doing some reading on Tim Cestnick’s site today and came by a great article on optimizing RESP contributions that I thought I’d share with you. For those of you who don’t know who Tim Cestnick is, he is a one of the most renowned Canadian tax authorities in Canada. He’s written a few tax related books, and makes regular appearances on ROBTV. Tim has come up with a plan to optimize your RESP contributions. ..The goal is to accomplish three things simultaneously: […]

A question about the timing of events in an RESP. Our first child is due May 15. Does this mean that I have until Dec 31 to contribute the $2000 to get the full CESG, or does it go based on the child’s birthday? And how does the CESG get paid? If I contribute monthly, does a percentage of the CESG get deposited at the same time, or do I wait till the end of the year?

A question that I know the answer to!!

Each year starting when the child is born (after ’98) you get one year’s worth of ‘grant room’. This can be carried forward indefinitely kind of like an rrsp however you are limited in how much you can contribute each year. Since the annual contribution limit is $4000/year, if you are behind you can only contribute two years worth of ‘grant room’ each year.

In your case you need to get a SIN number first before you can open an account, but you should be able to do that by next year sometime. In 2008 you’ll be able to contribute $4000 and get the full $800 grant. After that if you contribute $2000/yr you’ll get $400 grant /year and anything you contribute on top of that won’t get a grant.

And in answer to your original question – all the resp stuff is based on calender year so it doesn’t matter about the b-days.

Congrats on the soon-to-be-kid! Do u know if it’s a boy or girl?

Jack: Mike’s got it right regarding the grant room, and I can answer your second question – the CESG is deposited at the end of each calendar month.

I contribute to my child’s RESP every payday every two weeks, and at the end of the month there are CESG deposits equating to 20% of my contributions. If I contribute $100 twice in a month, there will be two separate deposits on the last day of the month for $20. This continues through the year until the maximum grant has been deposited ($400).

For the moment I’ve got the money invested in an asset allocation fund (RBC Target 2020 Education Fund), but I’ll likely switch the money to an index-fund based “couch potato portfolio” once there’s around $10k in the account.

I have mutual funds – 100% equity, 25% Cdn, 25% US, 25% Europe, 25% Asia.

And don’t worry, I’m getting a discount on the MERs. For the above portfolio the MER is 1.2%. Not necessarily the cheapest portfolio but I’m happy with it.

I was under the impression that the CESG did not carry forward?

And we’re having a boy!

Congrats – I have a 7 month old son so I know what you will be going through.

Yup – it definitely carries forward.

As an agent with a leading RESP company I am always astounded by the lack of information the general public has regarding RESP,s. It is evident that few people investigate all options open to them. Banks, insurance companies, mutual funds companies, finacial planners as well as RESP companies all offer RESP,s. There are significant differences in these companies plans. The main differences are the actual investment vehicles being used, the payout options, fee structures as well as a refund of fees. It is interesting to note that people will go from dealership to dealership to dealership when shopping for a car, then turn around and take RESP advice from a neighbor. Or open an RESP at the bank they deal with simply because they have other investments there. They are told it is “convienent”. You are talking about a long term investment to benefit your children. My advice is to do your homework and shop around.

To add to post 38, Glenn, and to add to what I posted above I would also like to add to not make the same mistake that I did and absolutely do not use an RESP company that charges fees up front. In fact, from my own experience, I tell anyone who asks me to simply set up a plan and use something like TD’s e-Funds or other low fee, low maintenance options.

Though my daughter (Whom I used CST) will probably have far less available than my son, only because I didn’t know as much about finances when she was born. Only time will tell if that is actually true, but considering there were something like $2100 of up front fees eating away at my years of compounding I have a funny feeling my low MER ETF’s for my son will out-perform.

The fees will be refunded at the end without any interest, and I suppose it locks people in so that they have a huge penalty if they cancel early. In my own opinion they have to do this because their product isn’t good enough on it’s own to keep people happy.

Glenn – good advice. Traciatim, I’m glad to hear that you made the effort to learn more about investments and put your plan in action. As far as your daughter’s resp goes, don’t blame yourself for not being an experienced diyer when you set it up. My opinion is that any kind of savings will take you most of the way to where you want to go. How you specifically invest that savings (ie rrsp, non-rrsp, debt etc) is a much smaller piece of the equation so in your case you still did a very good thing in setting up the resp and putting money into it.

A comment on both of your posts – I think the problem that people have with RESPs is that most people know nothing about them until they have a kid (why would they?) and then they panic because they want to get the thing set up as quickly as possible. It’s easy to say that they should take the time to do the research but that might not be that practical when you have a screaming baby with a diaper that needs changing :)

In response to Traciatim’s opinion regarding RESP companies up front fees, there are a few reason these plans are managed this way. In fact it is a benefit to the client. When I mentioned in my post ( #38 )that I recomend people do their homework, this is an example of what I meant. All RESP providers are regulated by the Ontario Securities Commision ( within Ontario ). You would think that the rules are the same for all. This is not the case. The regulations are far more strict on RESP companies than banks, insurance companies, ect. RESP companies are required by law to provide their clients ” full disclosure ” on their plans. This is why the fees are up front. An RESP company will tell you exactly what your fees for the life of the plan will be, they will not cost you a penny more. Call your bank. Ask them about all fees of their plan. Not just an MER. Also ask about all related fees. There are to many for me to list here. Outside an RESP company there is no full disclosure requirerments unless you ask for specifics. You also need to know what questions to ask. Then ask how much it will cost you at maturity. You will find that they cannot give you an answer. The reason is simple. Since they cannot tell you how markets will perform 5, 10 or 15 years down the road, they also cannot say what your return or fees will be. This brings me to my next point. An MER works similar to componding interest. Over the life of a plan outside an RESP company you can in fact expect to pay 3 to 5 time as much in fees. In my opinion that money would be better for your childern to use for school. The last point I would like to make is the refund aspect. An upfront fee allows RESP companies to invest a portion of the fee. At maturity there is enough of the return on the investment to refund fees. It sounds simple but it works and works well. I could go on for awhile but I think you get my point. An up front fee is in the best interest of the client. Providing thousands of dollars more for a childs education is what keeps RESP companies clients happy.

Glenn writes: “Outside an RESP company there is no full disclosure requirerments unless you ask for specifics.”

Huh? Full disclosure is required of the vast majority of investment products – stocks, bonds, mutual funds – they all have legal disclosure requirements. In any event, just because an RESP company discloses everything, doesn’t mean that their product is better than the competition.

You mention that banks have so many fees, that there are “too many to list”. This sounds like you don’t know what the fees are, or you’re just repeating a line that you read in your company’s training manual.

In any event, my RESP (through my bank) has no fees outside of the MER.

Glenn also writes: “An up front fee is in the best interest of the client.”

In that case, I have some excellent swampland to sell you. Send me my fee up-front, and I’ll be happy to tell you about it.

To me, an RESP company is only advantageous to somebody who lacks the discipline to save of their own accord. I know that I have no need for such outside encouragement, and I like the idea of choosing the investment products that suit me best. Others might find the hand-holding that an RESP company provides to be helpful, but I’m definitely not one of them.

Glenn, it really sounds like you’ve been heavily brainwashed into thinking that your company’s product is the be-all and end-all of education savings. Thank-you for at least having the decency not to post a plug for the company in your comments.

One thing I forgot, which is the biggest drawback to plans offered by RESP companies: they invest almost exclusively in low-risk, low-return investments. Primarily, these include government bonds and other fixed-income instruments like GICs.

The promoters even have the balls to sell this as being an “advantage” to their plans!

While this might seem like a good idea on the surface, the reality is that when you have 18+ years to save for a child’s education, you are better off investing in higher-risk, higher-return investments at least for the first few years, and then gradually shifting the asset allocation over the life of the plan.

Investing in a plan where the returns aren’t likely to exceed the inflation rate isn’t a good idea, especially when the cost of education is rising FASTER than inflation.

I’m all for RESPs, but I think it’s far better for parents to take the initiative to set up their own plans, and invest sensibly, such that the return of the plan will be greater in the long run than the increase in the cost of education.

Glenn, that’s pretty interesting. As George had already mentioned the only fees that I will also have is the MER of my funds too.

Here is some more food for thought. I started the plan for my daughter through CST almost exactly 60 months ago. I put $105.00 a month (as much as I could afford at the time). That means that I’ve put in $6300, and the government would have matched 20% to bring it to $7560. That’s a simple calculation with no interest or anything else.

My CST plan, however, is only worth $7150. On the statement from their website this also includes $462.76 of interest income. Even with interest I haven’t even caught up to my fees and I’m 5 years in. Good thing they are looking out for my best interest. Also consider this, if I put in 1260 a year and have made only 462 in interest, with no government match that means I’m earning something like 2.4% interest. It’s even lower if you include the interest that should have been on the government matched portion too.

Then take my son’s RESP that is set up with low fee ETF’s. I only opened it recently and have made a $1000 initial deposit (since I started late and need to catch up to my daughters plan so I contribute the same amount; who need the ‘they love you more cause they contribute more to yours’). I also have put in 4 $105 payments for a total of $1420, add on the 20% that that government throws in and you get $1704. Fancy that . . . my plan is worth just about $1710, even with the recent market corrections.

Realistically only time will tell if one does better than the other, but until proven wrong I wish I could shout it from the hilltops to stay away from RESP companies.

Interesting info Traciatim – 2 things, do you have any flexibility regarding how much you contribute to this plan to keep it active? Ie can you just contribute a minimum amount and then start another RESP with your online discount broker? That won’t help with the initial fees but it might increase your final $$ amount. Another thing is you mentioned you buy ETFs with your $105/month contribution. Do you pay a transaction fee each time? What about the CESG grant – what do you do with that? I’m just thinking maybe index funds would be cheaper to cut down on transaction costs.

I had to look this up – it appears you can open up other RESP accounts if desired.

4(a) How many plans can be established for one beneficiary?
There are no limits on the number of plans a subscriber can establish for a beneficiary, or the number of RESPs a beneficiary may have. However, the annual and lifetime contribution limits are per beneficiary, and cannot be circumvented by establishing multiple plans for the same beneficiary.

http://www.cra-arc.gc.ca/tax/registered/resp/faq-e.html

I like to think that being somewhat of an inteligent person I am capable of forming my own thoughts and opinions. So being heavily brainwashed as George puts it is not really the case. My statements and opinions are based on courses I have taken along with much personal research ( it is afterall my profession ). And yes , I also have extensive insight into my companies product. Therefore I am comfortable in saying that it is an excellent product.

Even though I think highly of our product I never claimed it was for everone. I only suggested that people research what they are getting into, regardless of what company it is.

If you are only paying an MER that is great and best of luck to you. I honestly hope that twenty years down the road you do not reflect upon our conversation and wish you had taken my advice.

I cannot help but notice that many people are intent on making comparisons of plans only a few years into them. Please kept in mind that the plans do not mature for some time. Traciatim has the right idea in the last line of post 44, realistically only time will tell.

I would like to say that I appreciate George’s acknowledgment that I do not post any plugs for my company. I truly believe that it is up to the individual to research and enroll in a plan the best suits their needs, regardless of what the company. I simply encourage people to do some thourogh research.

I have one last comment to make. This is just something to ponder. A number of our clients are actually bank employees, managers and yes, executives.

To Mike: I could theoretically start an additional plan to ‘top up’ my daughters plan with CST. However I want to keep my contributions even between my two children to avoid situations when they are older where one received more directly from me than the other. I’m already pushing just about the limit of where my budget will allow putting aside $210 all together for both my children, and the final word is that both of them will be better off than I was when I went to school.

Sorry, They are actually index funds and not ETF’s like I previously mentioned. I was in a rush on my way to work and messed up my terminology. I use a mixture of Canadian, US, and International indexes as well as a small (10%) in bonds. My plan is when my son turns 10 to start each year moving more and more in to safer investments as he grows to 18/19 years it will mostly all be nestled nicely in about a 30-70 mix of equity and safer investments. The funds I use have no entry/exit fees save an early redemption fee. Their MERs range from about 0.3 – 0.5% depending on the fund. The CESG also just gets deposited in the funds at when it comes in each month.

To Glenn: I’m curious to know what company you do represent so that I could read and compare to my current plans. You should e-mail it over to my gmail account: traciatim at gmail.com

Sounds good Traciatim, I kind of thought you probably didn’t mean ETFs.

Anyways my point about starting another RESP was to maybe stop making contributions to your daughter’s CST (if that is allowed?) and instead make the $105/m contributions in the new RESP instead. The reason for doing this would be to give you some control over the asset allocation which it sounds like you are not pleased with. I think at the end of the day the kids are going to be more concerned with how much is in the account when they are going to school rather than how much contributions were made.

One other thing to think about is that maybe you shouldn’t present the resps to your kids as “their” accounts? That’s kind of the idea behind family plans (which you can’t really do at this point) in that other than the grants, the money can go to any beneficiary. You are going to be the owner of the account so it will be up to you how the $$ gets dished out.

Glenn: you know more about the managed RESP plans than I do so correct me if my info is not correct. It seems to me that if someone who wanted to start an resp and was extremely risk averse and didn’t want a lot of hassle setting up an online account and picking their own investments would be best served by doing the following:

Go to their local bank, set up an resp account (even with $50/yr fees) and buying GICs with the contributions.

From what I understand from Traciatim, the upfront fees of $2100 will ensure that the managed resp balance will never catch up to the self-directed resp balance assuming both portfolios are in similar fixed income products. I realize you get the $2100 back 18 years later but inflation would have an impact over that time period. The other drawback of the managed resp is that I think if the child doesn’t go to school then the subscriber only gets the contributions back and none of the earnings? (is this correct?). If true then that would be another reason to do the self-directed RESP.

I guess what I’m asking is what are some of the benefits of the managed resp over the self-directed that would make up for the deficiencies I’ve mentioned?

Although that does sound like a good plan in theory, because of the evil scheme that CST uses to get people to join and pay fees, if I stop the contributions then they would also consider that a cancellation of the plan and it would be closed. My contributions would be returned to me, minus the 2100 in fees that were paid. Though these fees will be absorbed by other people in the plan to be paid out later so I would encourage other people with CST to take this route :)

I think this would be much more of a hit to the overall RESP for my daughter than just sticking it out at this point.

I had thought about setting up the Family plan for my son so that in case one of the kids didn’t go to school it would be easier to manipulate to get to the other sibling, but at the time of setting up the RESP for my daughter it was already just in her name. Plus, this way I get to use it as a strong arm tactic to get them both to go take a university/college level course or else some of the funds will be lost.

My plans will probably not pay for their entire education, but as I’ve stated a few times, as long as they are better off than I was when I went to school then I think they will be in good shape to start off their lives. No matter where the money is stored, this really is the goal here .

I just hope that everyone else reading these comments can learn from my mistake and set up a low maintenance system like I did for my son rather than using a company like CST which I feel like I was suckered in to due to lack of knowledge. Either way is just as easy, and one way doesn’t charge a large amount of fees for the same/similar service.

Traciatim – I just spent a few minutes perusing the CST prospectus and realized as you say that you can’t change the contribution schedule. What a rip, what happens if someone loses their job or has some other financial hardship? Doesn’t seem fair to me.
Another thing I saw in the prospectus (since you had mentioned poor returns) was that the returns they stated were quite good considering they are all fixed income investments. The numbers they had were 1 year return – 6.7% and 3 yr return – 7.4%. Then I noticed the small print which stated that these were gross returns instead of net of expenses. Pretty shady if you ask me. Further along the document I found the expenses which are applied to the fund as well as the fund size and it appears that the MER is around 5% or so which explains the difference between the 7.4% gross they claim for three years and the 2.4% return that you mentioned you got. Terrible stuff.
I’ll have to think about this some more but I suspect you are right in that you might be better off just staying with the plan – however I’ll let you know if I come up with a different opinion (for what it’s worth).