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What Are the Common Types of Registered Education Savings Plans and Which is Best?

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There are three common types of Registered Education Savings Plans. In the linked articles is information about them explaining some of the pros and cons of each. This article aims to help you choose which type of RESP will best meet your needs depending on whether you wish to invest in equities or not and on how much money you have to invest.

The Three Common Types of RESPs

Which is the Best Type of RESP for Someone Who Won’t Take Any Risks With Their Money?

Some people flatly refuse to invest RESP money in the stock market. There can be many reasons:

  • Their child will need the money to go to university, college or trade school in fewer than 5 years.
  • They have only managed to save a very small amount per year, perhaps $250, and would be horrified if they lost even $1 of it.
    (Note, though, that investing in savings accounts and in guaranteed investment certificates could mean losing money due to inflation. A text book that cost $100 10 years ago may cost $120 now. If the person put $100 into their RESP 10 years ago, and if it is not worth $120 today, it has lost ground to inflation.)
    Still, many people would rather lose a fraction of their money’s value to inflation rather than lose 10-50% if the stock market drops just when their child needs the money for school.
  • Their RESP only offers investing in the stock market through mutual funds which have very high fees and expenses.
  • They may have lost a large amount of money in the past by selling their shares or equity mutual funds when the stock market had dropped.

For these people, a bank or a brokerage held RESP is often the best.

If they only have small amount saved, the fees for using an online brokerage will probably be too high. (CIBC’s Investor’s Edge offers a RESP brokerage account with no minimum balance however there is a minimum purchase size of $5 000 per GIC.) In this case, a RESP at a credit union (which usually offers higher interest rates on GICs and cash deposits) or a bank is usually the best choice.

If they have a lot of money (about $15 000 or more) in the RESP, they may want to check the details of using an online brokerage to host their RESP. This is because brokerages offer GICs sold by many financial institutions which usually pay higher rates than those offered by a single bank. For example, today, in October 2014, BMO is offering 1.6% for a GIC that matures in 5 years. The minimum GIC purchase size is $1 000. At BMO InvestorLine they are offering 2.5% for a GIC that matures in 5 years issued by Home Trust. The minimum GIC purchase size, though, is $5 000.

Both banks and brokerages usually offer a daily interest savings account within their RESPs. Today, in October 2014, BMO is offering a rate of 1% in its RESP savings account. BMO InvestorLine is offering 1.25% in a savings account with a minimum $5 000 balance.

NOTE: It is worth checking what Credit Unions and Trust Companies are offering for their RESP accounts if you are interested in investing only in daily interest savings accounts and GICs. Some of these institutions offer the highest rates on fixed income investing. Always check what type of deposit insurance is provided, however, before setting up a RESP.

Personally, I do not recommend investing in group RESPs. For some reasons, please see the Advantages and Disadvantages of Holding a Group RESP through a Private Company.

Which is the Best Type of RESP for Someone Who Wants to Invest in Equities and Bonds But Who Doesn’t Have Much Money?

Other investors want to invest their RESP contributions in a variety of ways including some in bonds or a daily interest savings account, some in GICs and some in the stock markets.

If they do not have much money in the RESP (perhaps less than $15 000) it may be too soon to consider a discount brokerage account. That would depend on what the annual fee is for the brokerage, and what commissions and fees it may charge to purchase various investments.

If discount brokerages are out, that tends to leave RESPs held at banks, credit unions and trust companies. Of these, one is most popular: the TD Canada Trust e-Series Index Funds RESP.

One very popular “couch potato” method of investing for this type of person uses the TD Canada Trust e-Series Index Funds option.

These funds are bought and sold online which reduces the costs for TD to offer the funds. The management fees and expenses are relatively low compared to most other mutual funds. For example, the MER for the Canadian Index fund is 0.33 and for the Canadian Bond Index fund is 0.50. Like other funds, however, you can buy new units with no additional fee and you can invest small amounts.

(If you buy Exchange Traded Funds, or ETFs, from most brokerages, you will have to pay a commission of $5-$10 for each purchase or sale. There are some brokerages that offer free ETF purchases, though.)

You can read more about this type of TD e-Series Funds portfolio on the Canadian Couch Potato website.

For personal insights, the Big Cajun Man appears to have used these funds for his children’s RESP; you can read about his experiences at the Canadian Personal Finance site.

Remember as your child approaches the age to start using the money, you will probably want to shift your investments from equities to fixed income. For example, if you have $1000 invested in a TSX index fund, you may not want to take the chance of a sudden drop in its value to $500-$900 just before your child needs to spend the money. In that case, you should move the $1000 from the TSX index fund to a daily interest savings account fund or, less desirably, to a money market fund.

You can also set up a “couch potato” portfolio of mutual funds that mirror the stock exchange indices in a RESP at most major banks. The management costs and fees, though, for the funds (the MERs) may be much higher than for the TD e-Series funds. Please check all the costs carefully before choosing where to invest.

Personally, I do not recommend investing in group RESPs offered by private companies. For some reasons, please see the Advantages and Disadvantages of Holding a Group RESP through a Private Company.

Which is the Best Type of RESP for Someone Who Wants to Invest in Equities and Bonds and Has a Fairly Large Amount Saved?

This type of investor usually wants to have some of the RESP portfolio invested in

  • bonds,
  • GICs and
  • cash, and some invested either in
  • Exchange Traded Funds (ETFs),
  • mutual funds, or
  • individual shares and stocks.

Discount online brokerages offer an easy way to invest RESP funds in all of these categories.

Examples of these brokerages include

  • BMO InvestorLine,
  • CIBC Investor’s Edge,
  • RBC Direct Investing,
  • Scotia iTrade, and
  • TD Direct Investing.

There are also independents like Questrade. And, in fact, many large Canadian financial institutions have an associated online brokerage.

Are There Any Important Considerations When Choosing One Discount Brokerage Over Another for a RESP?

Yes.

In addition to the usual factors when choosing a brokerage such as

  • Which financial institutions’ GICs does it offer for sale? What is the minimum purchase size? Can they be purchased online or does the client have to phone in an order?
  • Does it offer a daily interest savings account no-fee fund? What is the minimum holding amount?
  • Are the screens easy to understand?
  • Is it simple and quick to execute a buy or sell of an investment?
  • Are the statements useful?
  • Does it offer a synthetic DRIP for the stocks and ETFs that I want to hold?

You should also be asking RESP-specific questions such as:

  • How much money does my account have to hold to avoid any annual fees, inactivity fees or maintenance fees?
    (Different brokerages use different names for these costs.
    For example, Questrade advertises that it does not charge an annual fee, but the fine print shows it charges an inactivity fee on small accounts if a certain number of trades are not made each quarter-year.)
  • What is the commission charge for each purchase or sale of units of an ETF or block of shares of the same company?
  • Does the brokerage support all of the government matching grants and bonus programs from which my child is entitled to receive money? (Most brokerages support the Canada Education Savings Grant, CESG, but not all support QESI for Quebec nor some of the other provincial grants such as the Saskatchewan one.)

Right now, in November 2014, it looks like CIBC Investor’s Edge may be offering one of the better deals for a RESP held by a “Big Five” Canadian bank online brokerage:

  • Investor’s Edge does not require a minimum balance in a RESP to avoid annual fees.
  • Investor’s Edge offers trades for a commission of $6.95 no matter how much you have in your account. This means to buy units of one ETF costs $6.95. To sell those units costs another $6.95.

There are other factors to consider, however, such as the fact the minimum GIC purchase size is $5 000 and they don’t offer GICs from Home Trust for sale.

Still, if our RESP was not at BMO InvestorLine, I would seriously consider hosting it at Investor’s Edge.

Group RESPs also often invest in stocks, bonds and funds on behalf of their clients. Personally, though, I do not recommend investing in group RESPs offered by private companies. For some reasons, please see the Advantages and Disadvantages of Holding a Group RESP through a Private Company.

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Do you have a RESP? Where did you choose to set it up? Did you choose one of these options, or another? Please share what led to your decision and whether you’re pleased about it with a comment.

Advantages and Disadvantages of Holding a Self-Directed RESP Account at a Discount Brokerage

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When you first start a Registered Education Savings Plan you usually don’t have much money in it. But if you are able to contribute enough each year to receive the maximum Canada Education Savings Grant, and especially if you have more than one child and you can contribute $2500 each per year, within a few years you may have over $10 000 in the account. That’s when many people begin to think about ways to maximize their returns and to resent the fees they often have to pay for mutual funds. One option to consider is opening a self-directed RESP online brokerage account so that you can choose GICs from a variety of places or invest in stocks, ETFs and mutual funds; this article lists some of the advantages and disadvantages of RESP brokerage accounts.

Pros for Holding your Children’s RESP at an Online Discount Brokerage

If you wish to invest in Guaranteed Investment Certificates, you are not limited to the ones offered by a single bank which may only offer low interest rates. For example, if your RESP is at BMO InvestorLine, you can buy GICs from over 10 financial institutions including Home Trust and Equitable Bank both of which often pay rates significantly higher than the major Canadian banks.

You can invest in a mutual fund which mimics a daily interest savings account. The going rate is usually slightly less than paid by online banks such as PC Financial and Tangerine. (For example 1.2% vs 1.3%.)

You can buy units of low fee Electronically Traded Funds, ETFs, that mirror the performance of major stock exchanges such as the TSX or the NYSE

You can usually select mutual funds offered by a large variety of financial institutions with no fee required for the purchase and no penalty for selling the fund after holding it for 90 days (no load funds.) If there is a specific fund you wish to invest in, though, be sure to check that the brokerage offers that fund before opening your brokerage account. Each brokerage offers slightly different investment choices.

You have total control over how the money is invested.

Making new contributions to the RESP is usually as simple as a typing a few numbers on a screen and clicking enter. (No more sitting through sales pitches disguised as contribution meetings at your bank.)

You can check the details of your account and its earnings almost any time. You do not have to wait for quarterly or annual statements.

You can arrange to have contributions made automatically to your account on a monthly or annual basis. (This is also true of RESPs held at banks and of group RESPs managed by private companies.)

Cons for Holding your Children’s RESP at an Online Discount Brokerage

Many brokerages do not allow you to apply for all of the matching government grant programs. If you are planning to apply for grants in addition to the standard Canada Education Savings Grant, CESG, check with the brokerage to find out whether it supports the desired program before opening an account.

You may need to have a large minimum balance to avoid paying annual fees. (There is at least one exception to this.)

No one will provide you with guidance or advice about what to buy.

You will have to choose how to invest your money and if you lose money because of your choices there is no way to recover it.

If you wish to invest in GICs you may find the minimum purchase amount is very large. For example, the minimum at BMO InvestorLine is $5 000 per GIC.

If you wish to invest in a daily interest savings account fund, the minimum purchase amount may be large. For example, at BMO InvestorLine you have to keep a minimum balance of $5 000 in the fund, or sell all of your units.

A mutual fund you wish to invest in may not be offered for sale by your brokerage. For example, no brokerage currently offers the Tangerine mutual funds. Check before you open an account.

Occasionally there may be a minimum investment requirement for a mutual fund. This tends to be set by the mutual fund company, such as Steadyhand, however, not usually by the brokerage. If it’s a concern, check before opening the RESP account.

You will usually have to pay a commission fee each time you purchase or sell shares of a company or units of an ETF. The commissions vary from about $7 – $10 depending on the brokerage. Some brokerages may waive the purchase commission for some or all ETFs.

If you are planning to use a dividend re-investment program for shares or stocks in the RESP, be aware that

  • Brokerage accounts offer a synthetic DRIP. You will only get a new share or shares if your dividend payment is enough to purchase one or more entire new shares of the company. You cannot buy fractional shares in a brokerage account.
  • Each brokerage has a list of stocks and ETFs that for which it offers a DRIP. You may not be able to DRIP all ETFs or all stocks. If this bothers you, check whether the stocks and ETFs you want to purchase are eligible for a DRIP before you open a brokerage account at that institution.

If you transfer in your RESP from another institution, you may or may not be provided with good information easily about how much of the plan comes from your contributions, how much from the government grant/s, and how much from earnings made by the investments. I strongly recommend you keep clear records yourself!

The brokerage usually does not have any mechanism to stop you from over-contributing to the RESP. You should keep accurate records yourself about your contributions and make sure you do not exceed the $50 000 limit per child. Also, it will not warn you if you are contributing more than is needed to get the matching CES grant for that year.

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Do you host your RESP at an online brokerage? Have you run into any other drawbacks that you’d like to warn us about? Please share your experiences with a comment.