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Whether or not you wish to help fund your children’s education is a very personal decision. I was fortunate enough to have my post-secondary education financed by my parents, and I am forever grateful for their support. However, I also saw the benefit of what financial independence did for my fellow students at a young age.
Understanding the process of taking out student loans, budgeting your money, and working hard are essential life lessons that they received from a young age by having to pay for their education.
There is no one-size-fits-all to money decisions across families. Feeling pressure and shame to fund your children’s education is authentic in today’s society, but other people’s expectations should never come between making the decision that’s right for you. If you decide that you wish to help fund your children’s education in any way, it’s essential to know what tools are available to you. The best way to save money for education in Canada is with an individual or family Registered Education Savings Plan (RESP).
That said, not all RESPs are created equal.
The RESP is available to Canadian parents to help save and invest for their children’s education, similar to how a Registered Retirement Savings Plan (RRSP) is used to save for retirement.
Now, you may be thinking: Doesn’t the TFSA offer me better tax treatment? Why not just use that?
Although the TFSA is a great way to grow your money and minimize taxes, what makes the RESP so unique is the government grant money you receive, called the Canada Education Savings Grant (CESG), and in some cases, the Canada Learning Bond (CLB).
Similar to the RRSP, the RESP has contribution limits, although they are calculated much differently. Unlike the RRSP, there is no annual maximum or minimum. There is only a lifetime maximum of $50,000 per child (otherwise known as the beneficiary). You can set up an RESP for a single child or a family plan with multiple children.
With the CESG, the government matches 20% of your first $2,500 each year, up to a lifetime maximum of $7,200 per child. Think of it like getting an automatic 14% return on your investment. Pretty sweet gig, right? Not to mention the CLB, which is available to lower-income families for up to $2,000 per child.
Both your contributions and the government grant money get invested and grow within the RESP tax-deferred. If and when your child attends post-secondary, the funds withdrawn will be taxable to them. You paid your contributions in after-tax dollars, so only the investment income and grant money will be taxed. The benefit is that college students are generally in a lower tax bracket.
If your child decides not to attend post-secondary, there are other options. With a family plan, you can quickly transfer the money to another child. If no children participate in post-secondary, or if it’s an individual plan, your original contributions can be returned to you tax-free. You will have to sacrifice the grant money, but up to $50,000 of investment income can be rolled over into your RRSP if you have the room. In other words, if plans change, there is little risk to you.
While I briefly touched on two types of RESPs above: an individual plan and a family plan, there is a third type of RESP you should be aware of, called a Group RESP, also known as a group scholarship trust.
Group RESPs are controversial due to their restrictive rules and lacking transparency. If you’ve ever heard a horror story where Canadians lost their education savings, likely it was with a group RESP.
I hadn’t heard of group RESPs until a few months ago. The topic came up at my former workplace when we thought that a new client held one. I learned that my colleagues did not recommend these types of plans, and the companies who sold them were highly frowned upon. Our team suggested that the client pay to get out, no matter the cost. I thought that this was an extreme response. Could a government-regulated product be so bad? I would soon find out.
How group RESPs work is that money from multiple families is pooled together in one “trust” with contributions and grants. With high front-end loads, most of the money being contributed in the first few years will go strictly to fees. This can cut into future returns as you want your money in the market to compound interest as long as possible. Sure, you supposedly get those fees back at the end, but what if you withdraw early or can’t contribute each month?
When I said that group RESPs have restrictive rules, I meant with their contribution schedules and withdrawals. Compared to traditional RESPs with no annual minimum, group RESPs have a strict contribution schedule that is agreed upon when you sign up, leaving very little room for unexpected changes over the decades in between. What if, say, a pandemic hit, and you can’t make your payments? This could violate the terms of the contract and sever your savings.
In 2016, a single mom from Timmins, ON, lost her $8,300 worth of savings. She unknowingly violated her contract contribution terms, only to find out when submitting a withdrawal request, putting her daughter’s upcoming education in jeopardy.
The same goes for early withdrawals. In 2017, the CBC spoke with a mother of two who requested her money to another institution, only to be told she would lose two-thirds of it. She was unaware of these costs and blamed their lack of transparency when she signed up as a new mom in a vulnerable position.
If you contribute on time each month and your child attends a qualifying institution, then a group RESP will payout in the end. Investment returns aren’t great, but members who stay profit from the earnings forfeited from withdrawn members. I’ll take returns where I can get, but potentially profiting off others’ misfortune doesn’t sit well with me. In my eyes, there is no benefit to a group RESP when flexible, higher-return RESPs exist at the bank.
Now, you may be wondering if you have a group RESP. An easy way to know is where you hold your RESP. If you save your RESP at the bank, you’re fine. Specialized companies sell group RESPs. Popular companies include Knowledge First Financial, Children’s Education Fund, and Heritage Education Funds.
According to the Toronto Star, the most prominent provider, Knowledge First, holds over 500,000 RESPs with over $6 billion in assets under management. These certainly aren’t small companies. These are large, for-profit businesses (supposedly) regulated by the government, and their “advisors” are commissioned sales reps who profit off the number of people they can sign up and how much they contribute.
Their sales tactics are known to be unprofessional and unethical – positioning at mommy-and-me group classes, doctor’s offices, and malls, preying off sleep-deprived parents. Sound shady? It gets worse. In 2015, a lawsuit ensued after a hospital clerk sold 12,000 confidential maternity patient records to Knowledge First Financial in Toronto.
These companies are profiting off of new parents who want the best for their children. They are vulnerable due to the overwhelming nature of new parenthood, the potential lack of financial education, and in some cases, even language barriers. There have been countless lawsuits of similar nature to the ones mentioned above involving these companies.
Hopefully, the various financial regulatory bodies in Canada can make a change. Canadian financial professionals have tried to speak out. In 2011, a group of Chartered Financial Analysts reached out to the Ontario and Quebec securities commission about their disapproval of Group RESPs. It stated that “the time has come to phase them out.”
While things hopefully move behind the scenes, it’s essential to educate your friends that are new parents about the risks of this product. If they still wish to sign up, then that is their call to make. The important thing is that they are provided with the full disclosure and transparency that they deserve because being a new parent is shocking enough.
Oh no, you missed the live webinar! But, good news: Mixed Up Money is pleased to share a resource for anyone planning for a future child or family.
Mixed Up Money is pleased to share a free resource for anyone looking to cut back on non-essential spending. My most-requested product is these monthly calendars to share on your Instagram story, use as a phone background, or print off to track your spending habits.
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