Sunday, March 31, 2019

Low cost DIY RESP, no more high management fee!

Hello, today I'll be writing about RESP and how you can open and manage your own RESP to avoid paying a hefty management fee. First off, for those that don't know what RESP is, it stands for Register Education Saving Plans. Like the name suggests, it helps with parents saving for their kid's education fund. There are two big benefits to this plan, the first is that the gains are not taxed if the money is used for education. The second benefit is the Canada Education Savings Grant (CESG), which is the government's contribution to the RESP. The government will contribute a maximum of $600 into the RESP depending on your income and contribution.

For more information with regards to CESG, you can find it on the CRA website. Here is the link: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps/canada-education-savings-programs-cesp/canada-education-savings-grant-cesg.html  

There is also a lifetime contribution limits of $50,000, again I'll suggest you check out the CRA website for all the information.

Opening an RESP
Well, first of all, you must be a parent to open an RESP. Sorry, if you are just planning to become a parent, the government won't let you plan that far ahead. Once your child is born then you can go to any organization that can sell investment or securities and open an RESP account. I myself opened an RESP Direct Investing account through my bank, similar to what I did for my TFSA. A lot of people think that just because it's an RESP you have to go through some education mutual fund company. However, you can buy individual stock, ETF or index fund within an RESP account. Banks will never tell you that option because they'll want to sell you one of their mutual fund for your RESP, therefore you'll have to specifically ask for a direct investment account.

Why do you want to do this? Because this way you can invest in a low-cost index fund for your RESP instead of a high-cost mutual fund. One of the RESP funds I saw had an annual management fee of 3% compared that to an index fund where the management fee is around 0.05-0.5%.

Managing your RESP
There isn't much management to be done, once you have an account open, set up for an automatic monthly contribution of $210, this will max out the government's contribution. Then you can go in every month to buy a low-cost index fund, mine is currently invested with the TD e-series Index funds. Then in a few months time, you'll see the government's contribution automatically being put into your account. I usually spend 5 minutes a month managing the RESP, so it is completely doable for any parents.

Watch it Grow
Then now you can sit back and watch your child and the RESP grow for the next 18 years.


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