Canadian RESP advice

[Lia-Aimee]

Hey guys,

So my Canadian sister (I'm American) is setting up an RESP for my nephew (9 months old.) I always assumed that someone would go into their bank or brokerage, open it like any other account, and invest within it.   But apparently there are other non-traditional providers...? She has an appointment with *someone* who is an RESP advisor (not part of a bank to my knowledge) next week specializing in RESP for low-income families; I'm joining by phone. Would love to know a bit more about this so I can have an educated discussion (RESP blogs / links more than welcome.)

ETF recommendations would also be awesome, I was thining CBD or AOM.


Thanks!

[Freedomin5]

I just spent the summer looking into setting an RESP up for my two year old. What I found most helpful was to look at the conditions/restrictions. Each plan/provider is slightly different with different restrictions.

Questions to ask might include: what happens to the money if kid does not go to university? Are there certain programs that don't qualify (I.e., does it have to be a four year program? What if he enrolled in a local community college and did a one year diploma in HVAC Repair? What if it was a 3-month TESL certificate offered at a community college?). Are there restrictions in terms of what the money can be used for? Does it have to be for tuition? Can it be for living expenses? What if kid gets a full scholarship? Can he use the money for something else? If kid decides not to go to university or doesn't need the full amount,, can the money be transferred to siblings? How about to the parent if the parent decides to pursue another degree later in life? What if kid doesn't go to a canadian university?

There were two major types if plans that I looked at: group plans and individual plans. The one offered at my bank (TD) was an individual self-directed plan, while the CST one was a group plan where you just throw money in and they guarantee a certain return/amount. It sounded like it was geared towards less financially savvy people.

In the end, we just opened a TFSA through an insurance company which provided some guarantees, dumped a bunch of money in, and we plan to leave it alone and let it grow. That was what made the most sense in our particular situation.

[the.one.who.wonders]

Being Canadian, and a wee bit knowledgeable into RESP since having my first child, I feel I can contribute.

The important thing to read here is this: WARNING.

In Canada, when you have a child, numerous companies start calling you up to proposer those RESP plans. They are brokers like "Universitas" that open the account on your behalf, invest the money and take care of managing the governments contribution for your child (this is the value of an RESP). You basically make direct deposit to them and they manage your money into pools of accounts... not unlike a mutual fund.

They have had a lot of bad press and complaints if you dig a bit on the web...  my opinion is that they prowl on the lazyness and ignorance of the common folk and offer lousy returns. Just ask them... takes them a few minutes of mumbling and when they realize you actually know market and investment theory they become red in the face, nearly ashamed of telling you their miserable returns and high MER% (Canada is the land of high MER% mutual funds in general)

The thing they do not say:
- Their lousy returns
- Anyone can open an RESP account in any standard brokerage firm and get 100% autonomy AND all the government returns.

This is the scam (imo):
https://www.universitas.ca/en/

These are some of the RESP you can open and manage on your own
http://www.rbcroyalbank.com/resp/resp-faq.html
http://nbdb.ca/en/education-center/brokerage-accounts/how-it-work-resp/


They are really good a telling you "We have the power of numbers, where you invest with 5000$, we go in with 60M, so we get better 'deals'" and other nonsense what sound impressive to unaware people..

[fullpampers]

Lonely artisan is right about those RESP companies. An unbelievable amount of people get screwed by them.

What I did was open a Familly RESP with Questrade ( in case we have another child, if not, than the FRESP works like a normal RESP).

And for the portfolio I did a 40% canadian equity and 60% world. VCN and VXC.

My son is 4 now and I'll keep that asset alocation until he is older. At which point I'll start adding bonds.

http://canadiancouchpotato.com/2010/11/05/taking-risk-in-an-resp/

You can look on the canadian couch potato website for more articles on RESPs.

[Heckler]

http://www.finiki.org/wiki/Registered_Education_Savings_Plan

Thats everything I know, including self directed advice on asset allocation from Bogleheads.  (Im not the author)

[JAYSLOL]

Being Canadian, and a wee bit knowledgeable into RESP since having my first child, I feel I can contribute.

The important thing to read here is this: WARNING.

In Canada, when you have a child, numerous companies start calling you up to proposer those RESP plans. They are brokers like "Universitas" that open the account on your behalf, invest the money and take care of managing the governments contribution for your child (this is the value of an RESP). You basically make direct deposit to them and they manage your money into pools of accounts... not unlike a mutual fund.

Yeah, we got a ton of calls from those A--holes, but we opened an RESP with RBC and told them to get lost.  Probably wasn't the best option investment-wise as RBC has fairly high fees, but i'm sure its better than going with those guys

[FrugalFan]

I agree with previous posters. RESP's should be invested like other long-term investments. I would use a brokerage like Questrade and invest through there (that's what I do for our two kids: 50% VXC, 25% VAB, 25% VCN). I will increase the bond holdings when they are older. This gives us total autonomy to make deposits whenever we wish and in any amount we wish. Any company investing the money for your will cost a lot more in fees and expense ratios, which ultimately means less money remaining in the RESP.

[okits]

Lonely Artisan and fullpampers covered it. "Specializing for low-income families" sounds like they prey on the uninformed.  Extra grants for RESP contributions come from the Canadian government.  You get them based on income, not the provider you use.

We chose Questrade and index ETFs (like the Canadian Couch Potato recommendation). 

If you're going to contribute some serious cash to this RESP, read up on all the details of the program (e.g. a family member can open an RESP account for a child.)  If you're the "wealthy aunt" who's going to end up paying for nephew's post-secondary education one way or another (RESP contributions and/or additional gifts in the future if the RESP returns and scholarships aren't enough), consider stipulating that substantial contributions come with a say in how the money is invested.  I wouldn't be forking over thousands of dollars if it's just going to an outfit skimming 2% every year and restricting access to the funds.

[Lia-Aimee]

Thank you all so much!

I agree, the "for low income families" part of the pitch made me quite uncomfortable and made me insist to be in on this meeting. 
I manage my (Canadian) parents money through RBC self-directed investing, and would much rather do that (or Questrade, good call) for the RESP.

Unfortunately I'm not a Canadian resident so I can't open one in my name, since the tax deduction won't have a big benefit for my sister, but I suppose the extra grants for low-income might make up for that.

Okits - 10 steps ahead of you on bending her to my will in exchange for cashmoney, I've been doing that since we were in high school :)

Greatly appreciate all the replies!

[okits]

Unfortunately I'm not a Canadian resident so I can't open one in my name, since the tax deduction won't have a big benefit for my sister, but I suppose the extra grants for low-income might make up for that.

There's no tax deduction for contributing to an RESP.  The benefits of this vehicle are the government matching grants and the ability for the investment growth to be withdrawn and taxed in the child's hands (presumably at or near 0%, due to being a student and likely having low/no other income at that time).

Okits - 10 steps ahead of you on bending her to my will in exchange for cashmoney, I've been doing that since we were in high school :)

<high five>!  I love it!  :) That gives me confidence that the education funds you give your nephew will benefit him, not some shady RESP company's salesperson.

[rocketpj]

Questrade and index ETFs for the win.

[Lia-Aimee]

Okits - I appreciate that reminder! Clearly I need to research the RESP more :)

[RidinTheAsama]

In the end, we just opened a TFSA through an insurance company which provided some guarantees, dumped a bunch of money in, and we plan to leave it alone and let it grow. That was what made the most sense in our particular situation.

You're leaving lots of money on the table with this approach!  Others have mentioned it but the main benefit of the RESP is the government matching.  Within a couple months of your deposit the government makes a matching deposit of 20% of your contribution up to $2500.  So by going TFSA instead of RESP you are leaving behind $500 per year, per kid!  Maybe more if you fall into one of the two lower income cutoff levels.

And while there are lots of really complicated and shady RESP options, it doesn't have to be that way.  Wherever you opened the TFSA, I'm sure you can open an RESP as well. It might be slightly more paperwork... but not much more.  Then you just invest exactly as you would have in the TFSA.

As far as I have been able to find out, the worst case scenario is that your child never goes into an eligible program (which is a huge list including lots of vocational training options) and in that case the government takes back it's 20%, leaving you in exactly the same position as if you had gone the TFSA route in the first place.

In my opinion, you'd have to be totally crazy not to take advantage of the RESP program.  Not meaning to be offensive, just to drive home how beneficial it can be.

[K-ice]

I think I met with one of those companies. They prey on the fact that some new moms are longing for adult company & are happy to meet for a while then feel vested. They sold the higher return idea because they keep all the cash of the kids that do not go to school in the pool. But I didn't want to risk loosing my principle.   

In the end I just went with my bank. It was pre-MMM so they are invested in GICs & mutual funds, not ideal, but I have control and may switch to Vanguard soon.

If I had to start from scratch today, I would invest in Vanguard Couch potato with my online RBC investing account.

http://canadiancouchpotato.com/wp-content/uploads/2016/01/CCP-Model-Portfolios-Vanguard-2015.pdf

Aggressive  Year 1-4
Assertive Year 5-9
Balanced Year 10-14
Cautions Year 15-19
Conservative  Draw-down period (maybe even all cash or GIC by this time)

I just made these years and balances up now. 

Does anyone else want to share their Vanguard risk/age balance plan?  Thanks "Travelling Biologist"

For all the rules without a sales pitch I would read the details on this site:

http://www.esdc.gc.ca/en/resp/info.page#h5

I was really surprised "RESP accounts can stay open for up to 36 years."  I think those scams have a shorter use it or loose it window.


To get the best grant leverage you can contribute $2500 per year. I max this out before my RRSP or TFSA because I think the government match is such a good deal.  I see it as making 20% on my investment!!!!!

The government match is upto $7200 with $500 per year.  So basically within your first 15 years (14.4) you should reach the match limit.  But $2500 per year * 15 years is only $37,500 and you can invest upto $50,000. 

So to actually maximize your deposits and time for compound interest you should invest $3333 per year ($50,000/15). Once they turn 15 you must stop since the contribution limit is reached and the grant limit is reached so just let the money compound for a few more years.
There are serious penalties for over contribution "you will be required to pay tax in the amount of one percent per month on your share of the over-contribution until it is withdrawn."

Oh wait! I am having too much fun with different scenarios. If money was no object you should invest $16,500 in year one, than $2,500 per year for years 2-14 and one final $1000 in year 15.  That would maximize the time for compound interest, but what new family has an extra $16,500 in the first year?

Psychologically I think a lot of us don't see the point in investing more than the $2500 to get the grant match, but if you had a windfall anytime during your kid's childhood you could throw a larger chunk down to take advantage of tax-deferred compound interest. There is "no annual contribution limit", however, you can invest too quickly and miss out on the grants.


If you want to invest more slow and steady, yet make sure you get the max grant, invest $2000 for 18years.  That will be a match of $400 per year * 18 years for the max $7200 grant.

I don't think you can go wrong investing between $2000 and $3333 per year, just keep track of your total contribution and stop once it reaches $50,000.


I hope that helps, just remember, something is better than nothing because of the 20% grant. Some provinces even offer a little more.

Please provide an update of how the meeting went.

 

[Lathome]

Depending on your sister's comfort level she may not like to do the fully autonomous approach. We went with wealthsimple for my daughters resp as its fees were lower than the banks' but they do trading and manage the government grants. You can sign up online and then she can make contributions whenever she's able. They've been helpful and we pay less than we would through a bank. Just another option to investigate in the world of high fees in Canada!