RESP Plan

The Real Cost of Opening an RESP Plan

A Registered Education Savings Plan (RESP) is an efficient method to save and invest money for children when they take admission in the post-secondary education program. Certain provinces and the government of Canada offer multiple grants to enable investors to build a healthy education fund for their wards.

You can contribute a total of $50,000 per child in a lifetime. You can leverage the invested money in multiple ways, including ETF, mutual funds, bonds, GIC, stocks, and more. However, the funds from this account can be used only for education at colleges, universities, and vocational courses among others.

This contribution is not tax-deductible. But the money locked inside the fund and grants received can grow tax-free until you withdraw the funds for educational purposes. For more information about RESP, check here.

How much can you contribute?

Canadians are allowed to contribute any amount per year. However, the lifetime contribution cannot exceed $50,000 per child in a lifetime. Any amount contributed beyond this limit is liable for a penalty of 1% per month until you withdraw the excess money.

To encourage you to save for your child’s higher education, the government provides the Canada Education Savings Grant (CESG). It is a grant of 20 percent on the first contributed amount of $2,500 to the RESP per year, limited to $500. For instance, if you invest $2,500 per year, you will get a maximum grant of $7,200 over the period of 15 years.

To encourage saving among lower-income families, the government has increased the CESG. From January 2005 onwards, the government now offers 20% extra on the first $500 for families having a net income below $45,282 (2016). Families having net incomes between $45,282 and $90,563 get an additional grant of 10% on the first contribution of $500.

Who should consider investing in RESP?

  • Parents who are doing financial planning to cover rising higher education costs in the future.
  • Grandparents can use RESPs to give money to their grandchildren for higher education.
  • Anyone including aunty, uncles, friends, and cousins who want to support a child’s education in the future can leverage the RESP plan.

What is the real cost of opening an RESP plan?

So, are companies accurately disclosing the real fees to parents that they are liable to pay the Bank or Group RESP companies?

In the majority of the cases, bank advisors tell parents that they just need to deposit $2,500 to their child’s RESP account per year to get the $500 as maximum education savings matching grant from the Canadian government without any conditions. Even when asked about any fee charged in the RESP, the answer is a firm “no.”

The government is not charging anything to open an RESP account and pay the CESG grant. The actual charges are levied by Group RESP companies and banks that can not be avoided. These fees are charged to open and manage the RESP account.

The fees of RESPs can vary widely due to multiple reasons, including how you invest the money and where you open the plan.

Resp opened with a financial institution

  • RESP plan opening: Normally, there is no fee to open an RESP plan. However, some institutions might charge a nominal set-up fee.
  • Annual administration fee: In most cases, no annual fee is levied for RESPs opened at a mutual fund company or a bank. The cost of other plans varies. You may get exemption from the annual fee if you have sufficient savings in the account or another account with the same financial institution.
  • Investment Costs: You need to pay a fixed commission when buying or selling stocks for your RESP plan. A sales charge is also applied to buying or selling mutual funds for your plan. Moreover, a management expense ratio (MER) is charged on mutual funds that you hold.
  • Other Costs: Special services are chargeable. For instance, transferring money to another RESP and changing the beneficiary is a chargeable process.

RESP opened with a scholarship plan dealer

  • Sales fees or commissions: It is also known as membership or enrolment fee. Salesperson or the company representative earns sales fees after the successful opening of your RESP plan.

In case your child doesn’t continue with higher education after the completion of high school, or you leave the plan early due to any reason, you are not eligible to get back your sales fees. You can only get back your sales fees if you cancel the plan within 60 days of signing the contract.

  • Annual fees: It includes trustee fees, administration, and deposit fees.
  • Other costs: You may need to pay penalties or fees to avail of special services, including transferring money to another RESP account, withdrawing the contribution early, or changing the beneficiary.

People who have a group plan may need to pay a fee for changing the payment schedule. It is advisable to go through the plan prospectus thoroughly to understand the actual cost of RESP.

Top question you need to ask before buying an RESP plan

Before opening an RESP account, you should know about all the charges to calculate the real cost of RESP.

  • What are the set-up or sales fees?
  • What are the fees for selling and buying investments via stocks or mutual funds?
  • What are the account maintenance fees?
  • What are the charges or penalties for requesting changes?
  • What are the annual trustee, deposit, or administration fees?

Endnote

In today’s scenario, when education costs are increasing exponentially, and you can’t deprive your child of the right to higher education, it is imperative to maintain a dedicated education fund for your child.

However, before opening an RESP account and starting saving in it, you need to ask all the pertinent questions about the actual cost of RESP. Having the right information about RESP account charges, management and investment fee, and other additional costs can help you plan your finances more efficiently.

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