On his personal finance site MoneySmartsBlog.com, Mike Holman gets more questions about RESPs than any other subject. "It's one of the most complicated investment accounts," he says.
For a lot of parents, setting up a registered education savings plan for their children is a daunting task. In fact, only half of Canadian parents with children under 18 have contributed to an RESP for their child, according to a recent BMO survey. Many claim they are either unfamiliar with RESPs or do not have time to set one up. It's too bad.
For Mr. Holman, a father of two young children, RESPs are simply the best way to save tax-free for the rising cost of post-secondary education while earning free cash in the form of the government's Canadian Education Savings Grant. To help parents better understand and make use of the accounts, he has written The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians .
The book begins with a basic introduction that covers how RESPs work and goes on to explain in detail the rules governing RESP contributions and grants as well as withdrawals from the account. Mr. Holman also provides a step-by-step guide to setting up an RESP and addresses several of the misconceptions that people may have about the savings vehicle.
"The biggest misconception is about the severity of the penalties if a child doesn't go to school," he says. "It's not so difficult to avoid." Many parents believe that if their child decides not to pursue a post-secondary education, they will not be able to touch the education savings account. In reality, though, parents' contributions to the fund are unaffected. Mr. Holman gives several tips on how parents can manage this scenario.
Another common misperception involves group RESPs versus self-directed plans. Group or pooled plans have many families contributing to them and generally require a minimum contribution on a regular basis. The plan's organizers manage the money and guarantee a certain level of payment toward your child's education.
"People often believe that their investments are more secure with a group plan than a self-directed plan," says Mr. Holman. However, you can set up a self-directed account with investment vehicles other than equities. A self-directed RESP that consists of GICs or bonds will create a similar risk profile. "Group plans aren't a scam," says Mr. Holman, "but fees are definitely higher. They're also more restrictive. You sign up for a monthly plan and if you can't pay it, there are penalties."
With the cost of a university education rising irrevocably higher - it can now cost as much as $60,000 for a four-year degree - the RESP is prepped to play an increasingly valuable role in our children's future. Mr. Holman's highly readable guide to this complex account is a great resource for new parents, as well as for those who are ready to finally set one up for their kids.