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How do I reduce the risks for my RESP?

How do I reduce the investment risk for my RESP?

  • Get expert help rather than invest on your own: If you choose an RESP from a financial institution, you can ask an adviser to help you invest your money.
     
  • Choose a managed portfolio type of RESP: Here, a professional money manager invests your money for you. They’ll talk to you about your goals and how you feel about investing, and then create a complete plan for your savings.
     
  • Join a scholarship plan: With this type of RESP, an expert invests your money along with other people’s money. The plan can only make low-risk investments, so you are less likely to lose money. Of course, a drawback with low-risk investments is that your money is likely to grow more slowly.

 How do I reduce future risk for my RESP?

  • Buy RESPs from a financial institution: These plans are the most flexible if you cancel, or circumstances change. With some scholarship plans, you may not get the full value of your savings back if you change your mind after 60 days.
  • Make sure your RESP has flexible rules: Ask your RESP provider what will happen if you need to cancel your plan if your circumstances change. With scholarship plans, you may not get the full value of your savings back if you change your mind after 60 days. However, some of these plans will let you transfer your savings into an individual plan if your situation changes.
     
  • Carefully consider whether to open a family RESP or separate individual RESPs if you have more than one child: The advantage of a family plan is that you can easily transfer money from a child who does not go on to study to one who does. On the other hand, all plans expire after 25 years, and if you have many children in the same plan, some of the younger ones may not be able to use the funds before the plan expires. Children who are just four years younger than other siblings may find they don’t finish high school in time to take full advantage of a family plan. Consider opening one or more individual RESPs for these children.

What if there is money left in the family plan when it expires? If this happens, you won’t have the option of transferring the assets to a Registered Retirement Savings Plan (RRSP), assuming you have contribution room. If you can’t do the transfer, all the investment earnings still left in the RESP will be taxed at your marginal tax rate when the plan closes. Plus, you will pay an added 20% tax penalty. Under these rules, you could end up paying up to 70 cents tax for every dollar you made investing! If you have another RESP in place, you can transfer the money there.

Tip: Set up RESPs for each of your children if there are big age differences. This should help stop any plan from expiring before a beneficiary reaches the age of 21. At some point, if it makes sense, you can transfer the individual plans into a family plan so your children can share the RESP assets in a new plan. However, keep in mind that you are not allowed to do it the other way around. You can’t divide up a family plan into multiple individual plans.

How do I reduce the risk of high costs for my RESP?

  • Think about how much advice you really need: In many cases, you will pay higher fees to get expert advice. If you’re comfortable making your own choices, you may want to choose an RESP from a financial institution. Fees may be lower for some self-directed RESPs as well.
  • Find out the costs of being in a plan before you buy: Before you join an RESP, ask about all the different types of fees you will pay. Also, find out which fees the plan will give back if you leave. In many cases, you don’t get a refund.
  •  Ask about the costs of any investment before you buy: Sometimes you will pay fees every time you buy and sell. You should think about what you will have left after you pay those costs.

Remember: There are always risks when you invest.

Make sure you understand the risks involved with any RESP you consider. Different plans expose you to different risks. Don’t sign until you’re sure you can live with the risks.