Author: Mike Holman

Group RESPs are RESP accounts where the earnings and grants of all the participants are grouped together. The plans are set up by birth year, so if your child was born in 2006, they will be grouped together in a plan with other kids who were also born in 2006.  One third of all RESP assets are with group plans.

It should be noted that most of the companies that offer group RESPs also offer non-group RESPs as well.  This article is only going to focus on the group RESP plans and differences between these plans and self-directed RESP plans which are the type you would have if you set up an RESP at a bank or through a financial advisor.

Here is a list of some of the companies offering group plans:

• Canadian Scholarship Trust (CST)
• Heritage Education Funds (HEF)
• USC Education Savings Plans Inc (USC)
• Children’s Education Fund (CEF)
• Children’s Education Trust Inc. (CEFI)

Differences between group RESPs and regular self-directed RESPs

**Note – the rules and differences mentioned here are somewhat generalized.  Each company has it’s own rules so it’s important to read the contract before signing.***

Group RESPs have two main differences compared to self-directed RESP accounts.

1. The earnings and grants of group participants are shared.  The kids that go to school will be able to withdraw their own earnings and grants as well as a share of the earnings and grants of the kids that don’t go to school.
2. Group plans have more restrictive investment choices, contribution and withdrawal rules.

What do they invest in?

Group plans invest in fixed income investments – namely bonds.  The idea is that they go for a lower rate of return with increased safety.  Investing in a group RESP is similar to investing in a bond mutual fund.

Self-directed plans have a more investment choices and can also invest in equities.  It’s important to note that a self-directed RESP can be invested in a safe bond fund or even GICs if 100% safety of the principal is desired.  See How to set up the Safest, Simplest and Easiest RESP account.

Enrolment Fees

Group plans are marketed by commissioned salespeople. There is a steep cost to joining a group plan which can be as high as the first 2.5 years of your contributions.  You don’t see this amount coming out of your pocket, since it is deducted from your contributions for the first year or two.  There are annual account charges as well as management fees applied.

The initial fee is usually refundable at the discretion of the RESP provider.  This is typically paid back once the child starts going to post-secondary education.  The problem of course is inflation and lack of earnings on the enrolment fee.  If you pay $2,000 in fees and then get back $2,000 18 years later – if inflation is 3% – in today’s dollars you are actually only getting $1,156 dollars returned.  That means the net fee (if the child goes to school) is $844.  Plus, that money is not earning you anything since it’s not invested in your account. Another issue is that if you will lose some or all of the enrolment fee if you don’t keep up with your contribution commitment.

Self-directed RESP accounts have varying fees and costs depending on the type of account you choose and the investment vehicles you choose.

Contribution schedules

Group RESPs have strict contribution schedules. If you commit to contributing $50 per month, you had better keep paying $50 per month or you might forfeit your enrolment fee.

Self-directed RESPs have no contribution commitments.

Eligibility for post-secondary

Generally, group RESPs can only be used for full-time study.

Self-directed RESPs can be used for part time study as well as full time.

Withdrawal schedules

Group plans have restricted withdrawal windows so if your child changes their plans, it could affect the amount of money they can withdraw all the money out of their RESP.

Self-directed RESPs have very little withdrawal restrictions – namely the $5,000 limit on non-contribution withdrawals in the first 13 weeks.

RESP grants

Both group and self-directed RESPs are eligible for the same government RESP grants.  There are no differences here.

Shared earnings

Group RESP plans disperse the earnings of participants who don’t use their money to other kids in the same group who do go to school, thereby boosting their return.

Self-directed RESPs have no such sharing.

Withdrawal penalties

Typically, if a kid quits a group plan or doesn’t use the money when they are supposed to – only contributions will be returned minus enrolment fees.

In a self-directed plan, if certain conditions are met (student is 21+ and plan has been open for 10+ years), contributions as well as earnings (minus a heavy penalty) are returned.

Sharing RESP money between siblings

Group plans typically don’t allow sharing of RESP money between siblings.

Self-directed plans do allow sharing.

Conclusion

Group RESPs are a very convenient way to set up an RESP since the salesperson will visit your home to help set up the account and you don’t have to worry about making any investment choices. The main drawbacks of group RESPs are the extra rules imposed on top of the existing federal RESP rules as well as high fees. These extra rules and restrictions mean that the odds of your child being able to use all their RESP money are less than if you set up a self-directed RESP account.

If you can keep up the contribution commitment and your child goes to school when they are supposed to – you’ll probably be satisfied with a group RESP.  However, if there are any problems such as changing the contribution amount or schedule, or if your child doesn’t attend school right away after high school – you might be very unhappy with the group RESP.

I don’t recommend group RESPs because there isn’t really any reason to take on the risk from extra restrictions imposed by these plans.

Do you have any experience with group RESPs?

Other resources

• RESP Rules and Strategies
• Pros and Cons of Group RESP plans
• Lack of flexibility a big problem with Scholarship RESP plans

Family RESP plans are very popular with families that have more than one child.  Family plans save on account fees, paperwork and the best benefit is that if one child doesn’t use their RESP money, it can be easily shared with a sibling.

Normally, you would share RESP money from the older child with the younger child in case the older child doesn’t use it.  However, it can work the other way as well – you can share the younger child’s RESP money with the older child who is attending post-secondary education.

Here is a scenario: You have two kids – one older, one younger and you didn’t start the RESP until later on. The older child has not reached the $7,200 lifetime grant limit. The older child is going to school, receiving payments from the RESP and is not eligible for any more RESP grants.

You can contribute to the younger child’s RESP and the older child can withdraw the money. 

If there is a big age gap – there will be plenty of years of contribution remaining for the younger child, so this strategy could even out the total contributions between the kids if you started late.  Or perhaps your older child is a Rhodes scholar and the younger child is the captain of the football team and is less likely to need an RESP. 

Whatever the scenario, sometimes it makes sense to give more money to one child over the other.

Example:

Sue has two kids with an age gap of five years. Because of a tight family budget, an RESP account wasn’t started until the older child was 15 and the younger child was 10.

Sue made maximum contributions for the older child of $5,000 per year and there was approximately $19,000 in the RESP for the older child when she started school.  Sue has also been making $5,000 contributions per year for the younger child and he now has $25,000.

The older child has run out of RESP money and Sue is wondering if she can use the younger child’s RESP money for the older child.  Part of her thinking is that the older child is doing very well at school and the younger child is ….not so sharp.

Normally if a teenager is doing poorly at school, the last thing you want to do is put more money into their RESP, but in this case – it’s a pretty good investment.

Because the older child is going to University, if Sue contributes to the younger child in the family RESP account, the money can flow directly to the older child who is in need of the money.

Have you ever seen one of those ads promising big investment returns if you subscribe to a stock tip newsletter or sign up for an expensive trading course? Well, have I got a deal for you!

This investment tip is guaranteed to give you a 20% return with a maximum time frame of two months. Unfortunately, most of you won’t be able to take advantage of it right now, but if you have an RESP account – keep it in mind for the future.

Here is the tip:

Maximize your RESP contributions while your child is attending school and already making withdrawals.

How it works

Your child turned 17 this year and just started University. You withdrew money from the RESP to pay for their first semester. In mid-December you get a bonus from work and contribute as much as you can to the RESP. The 20% grant based on the contributions will arrive at the end of January and can be withdrawn immediately.

• Total time of investment – 6 weeks.
• Total return – 20% (or more if you are eligible for additional RESP grants based on income)

Why is this any different than any other RESP contribution?

Because the child is already enrolled in school and there will be almost no doubt you can withdraw the money without penalty. Most RESP contributions are made before the child starts school and it is not guaranteed that you’ll be able to keep the grant and make proper educational withdrawals, since they might not attend post-secondary education.

The other difference is that you’ll be able to make the withdrawal as soon as the grant has been placed into the RESP account which should happen within two months of the contribution. Not only is the 20% return guaranteed, it’s also very fast.

Are you allowed to contribute to an RESP after a withdrawal has been made?

Yes, you are.

Who can do this?

As I mentioned at the top of the post, this guaranteed investment option is not available for everyone. Here are the necessary conditions:

• Child has to be enrolled in an eligible post-secondary educational institution.
• Contributions have to be made by the end of the year in which the child turns 17.
• Child has to be eligible for RESP grants as a 16 or 17 year old. Here are the RESP contribution rules for 16 and 17 year olds.
• Maximum lifetime grant limit of $7,200 has not been reached. Call the HRSDC at 1 888 276 3624 to find out the grant total your child has received.
• Annual grant limit of $500 ($1,000 if carrying over a year) has not been exceeded. Here are some RESP contribution examples.

What if the student doesn’t need any more money?

Do it anyway. You don’t have to show receipts with making an RESP withdrawal. Make the contribution, get the 20% grant and then use it for some extra tutoring or beer. See 8 Things You Need to Know About Withdrawing Money From Your RESP Account for more information.

I don’t have any cash. Should I borrow money to do this?

If you can borrow money at a reasonable rate and can get a decent sized RESP grant, then this is one time that borrowing to contribute into an RESP is a good idea.

For example; Let’s say you borrow $5,000 in early December at 7%, contribute the money to an RESP, get the $1,000 grant at the end of January and withdraw immediately.

Your total interest charges will be around $60 and you will have an extra $1,000 inside your RESP account.  That’s a pretty good deal.

Reader Holly sent an interesting RESP question via email:

We have RESPs in a family plan for our two older children (13 and 15).  I’m not pleased with the investment options here, but since the eldest is so close to college and it’s not a significant amount of money, I don’t think we’ll transfer institutions.

We just had a baby and I’d like to set up an RESP at TD Bank with the e-series funds since there is so much time before she’ll be on to higher education.

I’m confident that my eldest child will go on to college, but we’re not so sure about the middle child.  Hopefully, the baby will choose when the time comes to go on to college/university.

My question is regarding how to set up the plans as family plans at differing institutions.  Can you do that?  Is that the best idea?  What would you suggest given the huge age gap between our kids to ensure that we can save and transfer any unused dollars between the children.

First off all – You can’t set up a family account between institutions.

You can however, share RESP money between individual accounts for siblings as long as the subscriber is the same for both accounts.  This isn’t all that practical between institutions though.

What I would suggest is to think about the following:

1. Set up an individual RESP for your new baby at TD as you planned.
2. Add the new baby as a 3rd beneficiary for your existing family plan RESP.  That  way, if there is still money left in the family plan in 17 years, they can utilize  it without penalty.  The account can be kept open for 35 years after the year it was started.
3. Another idea is to consider paying out some of the middle child’s RESP money to the older child when they start school.  This could be problematic since only $7,200 of RESP grants can be paid to one beneficiary, but it’s something to think about.  This money could be used for the older child or kept in a TFSA or non-registered account for the middle child.  The idea is to reduce the risk that if the middle child and the baby don’t go to school, extra penalties might have to be paid.

Suggestion #3 is very debatable, but in my opinion there is a lot to be said for getting money out of an RESP account without penalty when given the opportunity.

More RESP information

• RESP rules