Closing a group RESP

If your monthly income level isn’t predictable, the rigid payment schedules of group RESPs may not be your best savings plan.

Here’s one married couple who left their group RESP and built a new savings plan for themselves and their young daughters.

William, 39, and Teresa, 38, are married and live near the Alberta oil patch. They have twin girls, aged 10. William’s an independent contractor providing trucking services to firms in the oil sands, and Teresa teaches high school chemistry part-time. Their combined annual income is $150,000.

The problem

When the kids were born, a sales rep convinced them to enroll in a group RESP. For five years, they met the rigid monthly contribution schedule. But when the meltdown hit, William’s business suffered, leaving them unable to make contributions from 2008 to 2012.

The business has recovered, so he and Teresa are ready to resume saving.

Since they didn’t keep up with RESP payments, the couple had to forfeit their enrollment fee, gains on their invested capital, insurance and other fees. Now $2,200 remains in the plan.

They’ve told their advisor they want a flexible self-directed RESP. Even though William’s business is thriving, it faces stiff competition and doesn’t always win contracts, so his income stream remains unpredictable.

They now need to figure out what to do with the $2,200 left in the group plan and make a new savings plan for the next eight years, before the girls head to university.

The solution

For money left in their group plan, they could either pull the money out now, or wait to withdraw when the kids enroll in university.

Jay Nash, a vice-president and portfolio manager with National Bank Financial, notes group RESP terms are highly complex and vary from company to company.

“In some cases there are ongoing administration fees on top of the enrollment, insurance and other fees,” Nash explains. “But some plans trigger administration fees only with incoming contributions. In the first case, complete withdrawal may be the best option; in the second, leaving the funds in the plan could be better to avoid additional withdrawal penalties.”

In order to maximize their education savings, Nash suggests the couple tap unused government grant room. The government matches 20% of RESP contributions, to a maximum of $500 each year.

So for the next five years, they can make contributions large enough to earn both the grant for the current year and the unused grant room from one of the previous years. In 2013 they can contribute $5,000 per child. The first $2,500 gives them the maximum grant of $500 for the current year; the other $2,500 secures the unused grant from 2008. This continues through 2017.

Once they’ve caught up, William and Teresa should scale their contributions back to $2,500 per daughter, per year.