Posted on: 21-11-04 12:58:45
Hello,
I have a few questions about RESP.
1. First of all, is this the best method for savings for a child's education?
I have heard opinions both ways - what do you guys think?
I have also been contacted by some "agents" who say they can set up funds for us where the govt. will contribute money every year, etc.
One of such agents is from a company called USC Education Savings Plans Inc.
Are these genuine and how are they different from RESP?
2. What is the process for selecting the best RESP?
Can I open RESP account at any of the regular banks like TD, RBC, Scotia, CIBC, etc. ?
3. Do I need a SIN number for our baby before we can open RESP account?
We don't have any proof of identify for her yet - her birth certificate hasn't arrived yet, so we haven't been able to apply for anything like passport, SIN etc.
All we have is OHIP Health Card.
What to do?
Thanks anyone for any help.
Quote:
Orginally posted by FrozenTundra
Hello,
I have a few questions about RESP.
1. First of all, is this the best method for savings for a child's education?
I have heard opinions both ways - what do you guys think?
I have also been contacted by some "agents" who say they can set up funds for us where the govt. will contribute money every year, etc.
One of such agents is from a company called USC Education Savings Plans Inc.
Are these genuine and how are they different from RESP?
2. What is the process for selecting the best RESP?
Can I open RESP account at any of the regular banks like TD, RBC, Scotia, CIBC, etc. ?
3. Do I need a SIN number for our baby before we can open RESP account?
We don't have any proof of identify for her yet - her birth certificate hasn't arrived yet, so we haven't been able to apply for anything like passport, SIN etc.
All we have is OHIP Health Card.
What to do?
Thanks anyone for any help.
Hi FrozenTundra,
Answer to Q.No. 1: Please read my article on 'Registered Education Savings Plan (RESP)-FAQs' and discussion thereon.
As long as you deposit money in RESP, the Govt. will add 20% to it (see the limits on this in the article). If you don't contribute to RESP there won't be any Govt. contribution.
Answer to Q.No. 2: The RESP is offered by all the Banks, Insurance Companies, Investment Dealers, Trust Companies, Scholarship Funds etc. Among all the RESPs set up in Canada, the Scholarship RESP is the most popular one. The big companies that offer these RESPs are: Heritage, CST, USC and CET.
Typically the Banks invest your RESP money in mutual funds. Though the investment period is long and your investment may show an overall positive growth, yet there are two major concerns when you invest in mutual funds.
(a) The stock market may be going through a bad patch when you need money for the tuition. You cannot wait for the market to correct itself and then withdraw your RESP money and (b) every year you have to pay MER to the tune of about 2% on the net assets. That takes away a big chunk of your RESP money.
In the Scholarship Plan you do pay a membership fee but it is returned to you when your child goes to college or university.
Answer to Q.No. 3: To open an RESP account with the Bank you need SIN for the baby. However, a Scholarship Plan can be opened without a SIN but you have to provide SIN within 12 to 24 months.
If you need to discuss any other issue related to RESPs you can e-mail me. I have recently compiled data that would help you in selecting the best Scholarship Plan for your needs.
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Man's Best Friend 
Thanks for the reply, Mr. Teja Gill.
I have a couple of follow-up questions:
First of all, are the RESP investment protected by the govt. in any way (like FDIC insured deposits)?
So, if tomorrow the investment markets go down the toilet, are the contributions protected, even if the interest is not, or do you lose all the money?
Quote:Where do the other institutions like USC invest the money?
Typically the Banks invest your RESP money in mutual funds.
Also, the USC agent who contacted me claimed that they are "non-profit" - does that mean anything or is it simply marketing?
What are the fees that we can expect to pay for this kind of investment - is there any monthly maintenance fee or a yearly fee, etc?
Quote:What is MER?
(b) every year you have to pay MER to the tune of about 2% on the net assets. That takes away a big chunk of your RESP money.
Quote:
To open an RESP account with the Bank you need SIN for the baby. However, a Scholarship Plan can be opened without a SIN but you have to provide SIN within 12 to 24 months.
What should we do if we want to open an account right away?
Birth certificates are taking almost 8 months in Ontario.
Is there any other identification that can be used?
Thanks again for your help.
Quote:
Orginally posted by YoursTruly
Answer to Q.No. 2: The RESP is offered by all the Banks, Insurance Companies, Investment Dealers, Trust Companies, Scholarship Funds etc. Among all the RESPs set up in Canada, the Scholarship RESP is the most popular one. The big companies that offer these RESPs are: Heritage, CST, USC and CET.
Typically the Banks invest your RESP money in mutual funds. Though the investment period is long and your investment may show an overall positive growth, yet there are two major concerns when you invest in mutual funds.
(a) The stock market may be going through a bad patch when you need money for the tuition. You cannot wait for the market to correct itself and then withdraw your RESP money and (b) every year you have to pay MER to the tune of about 2% on the net assets. That takes away a big chunk of your RESP money.
In the Scholarship Plan you do pay a membership fee but it is returned to you when your child goes to college or university.
Teja Sahib,
I also have questions about these sholarship plans. I tried visiting various websites but could not get the answers to all the questions I have. It would be really nice if you could clarify these or direct me to a place where I can find some of the answers.
You mentioned that these scholarship plans are the most popular.
Can we take it as these are the best plans for every one?
Do they suit every one, regardless the age of the child etc. ? Or the age of the child at the time of opening the accounts have some bearing on the returns/scholarships he/she would get it future or would he/she have to contribute more in comparison to other kids who are already enrolled?
Are the returns there guaranteed? As I have heard over the radio that some of the plan agents claim that their plan has been giving 13.95% return to its subscribers for the last 7 years. Is that return a guarantee for new joinee also ? Are these returns still sustainable specially when the interest rates have been very low for the past couple of years?
Is it true that these returns are inflated as most of the unfortunate people lose out on the benefits because of not being able to complete the plans and their portion is also distributed to others who complete giving them better returns?
You mentioned that the unit fees is returned if the child goes to school. What happens if the child does not go to university/school at all?
Suppose some one starts the plan, pays it for 2-3 years and then does not pay for 5-7 years or till the completion of plan. Would the child get the money (susbscriber's money and CESG) or not? If yes, would it be full amount or would there be any deductions? What happens to the unit's fees at that time? Are that returned or not?
Please guide me accordingly.
Thanks and regards,
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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada
Hi FrozenTundra,
The following would try to address your questions.
Are the RESP investments protected by the govt. (like FDIC insured deposits)?
Similar to the US agency FDIC, in Canada we have an agency that insures deposits. It is known as the Canada Deposit Insurance Corporation (CDIC). According to the CDIC brochure “the maximum basic protection for eligible deposits is $60,000 (principal and interest combined) in each member institution”.
If your RESP contains GIC investments with a CDIC member then these would be protected. Investments in mutual funds, stocks, bonds etc. are neither insured by CDIC nor by any other agency.
If tomorrow the investment markets go down the toilet, are the contributions protected, even if the interest is not, or do you lose all the money?
Yes, if the markets tank your investments go down with the market.
Where do the other institutions like USC invest the money?
The Canadian Securities Administrator’s (CSA) National Policy 15 stipulates the investments allowed under the Scholarship Plans. These are govt. and govt-guaranteed bonds and debentures, GICs and certain Mortgage Backed Securities based on mortgages insured under the National Housing Act. That is why these investments are considered secure.
The USC agent who contacted me claimed that they are "non-profit" - does that mean anything or is it simply marketing?
The Scholarship Foundations are non-profit but the Scholarship Dealers are not. Now you can draw your own conclusions about that agent’s claims.
What are the fees that we can expect to pay for this kind of investment - is there any monthly maintenance fee or a yearly fee, etc?
I am glad you asked this question. Because this is the area where most agents won’t give you a straight answers.
The Scholarship Plans, also called Group Plans, invest the pooled money as units. The size of a unit varies with Plan vendors. To buy one unit in any plan you have to pay a one-time membership fee/enrollment fee. The CSA has capped this fee to a max of $200 per unit. As previously mentioned, the unit size varies from vendor to vendor and hence the fee per unit. Therefore, a prospective customer should look out for a plan with the lowest total membership fee and not the lowest per unit fee. The membership fee is returned in one or more installments after the plan matures.
In addition to the above, there are other fees that are charged to the Plan. These are typical fees. One should compare different plans to locate the one with the lowest expenses.
Annual Administration Fee-typically between 0.5 to 1.5% of the Plan’s assets.
Annual Investment Management Fee-typically less than 0.50% of the Plan’s assets.
Annual Trustee Fee-typically a fraction of 1% of the Plan’s assets.
What is MER?
MER is the Management Expense Ratio typically charged by mutual funds in addition to front-end or back-end loads. Average MER for Canadian Mutual Funds is more than 2%.
What should we do if we want to open an account right away?
Birth certificates are taking almost 8 months in Ontario.
Is there any other identification that can be used?
Since these Plans are registered with the Canada Revenue Agency, it is mandatory to provide SIN. As mentioned earlier the Banks insist on SIN before they can start the Plan but the Group Plan dealers would open the account and you would be given time anywhere between 12 to 24 months to provide the SIN. In this non-SIN period your plan won’t be a registered plan (and hence won’t attract any CESG) but would be earning income equal to the other normal plans. Once you provide the SIN, the Plan would be backdated so that you don’t lose any benefits.
It is not very easy to explain all the nuances of different plans here. If you would like to discuss further please call me. I’d be happy to address your concerns.
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Man's Best Friend
Pramodji, the following effort may address the issues raised by you in your post.
You mentioned that these scholarship plans are the most popular. Can we take it as these are the best plans for every one?
These Plans represent the best option for a vast majority of Canadians. However, if you are investment-savvy then you should go for the self-directed RESP where you are in full control of your plan. Moreover if your child is over 15 years (in some plans the max age is 12 years) you cannot open a Group Plan. In this case you have no other option but to search for other alternatives.
Do they suit every one, regardless the age of the child etc. ? (see above for the answer)
Or the age of the child at the time of opening the accounts have some bearing on the returns/scholarships he/she would get it future or would he/she have to contribute more in comparison to other kids who are already enrolled?
The Group Plans ensure that each enrolled child, irrespective of the age at enrollment, gets the same amount of money per unit. As the enrollment age increases the cost of each unit increases and since you can buy only $4,000 worth of units in a year, the older children end up with less number of units. In other words, for children who join late and hence cannot buy sufficient units, the total money available for tuition might not be adequate to meet education expenses.
Are the returns there guaranteed? As I have heard over the radio that some of the plan agents claim that their plan has been giving 13.95% return to its subscribers for the last 7 years. Is that return a guarantee for new joinee also ? Are these returns still sustainable specially when the interest rates have been very low for the past couple of years?
In the investment industry nobody can guarantee returns. However, we can say that the investments in Group Plans are less risky as explained in answer to a question by FrozenTundra.
Four major Scholarship Dealers (including the one advertising 13.95% return) are members of the RESP Dealers Association of Canada (RESPDAC). The association has barred its members from quoting the returns without proper disclosures. The 13.95% return quoted includes the money from discontinued plans and does not reflect the growth of actual investment.
I have taken the following information from the prospectuses of various Group Plan dealers that would give you the actual growth of assets since 1999. The tabulation also hides the answer to your question: “Are these returns still sustainable specially when the interest rates have been very low for the past couple of years?”.
Rate of Return for Various RESP Plans
Year.........1999......2000.....2001.....2002.....2003
CET...........6.70%....6.10%....5.90%...5.60%.....5.80%
USC..........6.29%.....5.84%....5.71%...5.56%.....5.30%
Heritage...8.24%.....7.92%....7.34%...6.88%.....6.54%
CST..........5.74%.....5.94%....5.66%....5.97%.....5.89%
You mentioned that the unit fee is returned if the child goes to school. What happens if the child does not go to university/school at all?
If your child does not pursue higher education, you can either nominate another beneficiary (subject to meeting some conditions) or cancel the Plan. When the Plan is cancelled you get back your savings minus the membership fee. The CESG is then returned to the govt. and any income earned is applied to an enhancement fund that is used to enhance scholarships.
However, some Group Plans offer you an option, in the event your nominee does not go to college, to transfer up to $50,000 of your RESP money to your RRSP account. The amount eligible for transfer includes your savings and incomes earned on your savings and CESG. The principal amount of CESG is returned to the govt.
Suppose some one starts the plan, pays it for 2-3 years and then does not pay for 5-7 years or till the completion of plan. Would the child get the money (susbscriber's money and CESG) or not? If yes, would it be full amount or would there be any deductions? What happens to the unit's fees at that time? Are that returned or not?
Most of the Group Plans offer two very important features and I think a contributor must be familiar with these in order to enjoy full benefits of the Group Plan. Unfortunately many plans get terminated because the contributors were not aware of these features.
(1) Each Group Plan comes with a number of contribution options
(2) Each contributor enjoys privilege to opt for conversion from one contribution schedule to another any time during the plan life.
Keeping the above in mind I will answer your question.
Let us assume the plan was in monthly contribution mode and it was active for 2-3 years but due to some reason there was no contribution for the next 5-7 years or for the remaining period of the plan. Under such a situation if you do not take any action and the Scholarship dealer is not able to locate you, the plan would be terminated and all your money would go to the enhancement fund. However, if you knew that you cannot contribute further to the plan then you should use your conversion privilege and convert your plan from monthly mode to lump-sum mode. Thereby your plan would continue without further contributions and your nominee would enjoy the scholarship assistance upon plan maturity.
In short, it is the agent’s responsibility to make sure that the education plan meets its goals by conducting yearly reviews and making mid-course corrections, if required.
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Man's Best Friend
Hi YoursTruly,
Could you please provide last 5-7 years of return for RESP companies just like you did for 1999-2003 ?
Do you prefer CET or TD - e-series funds ? Why ?
Thanks
