A Group Registered Education Savings Plan (Group RESP) is a popular way for parents and guardians in Canada to save for their children’s post-secondary education. But like any financial decision, it’s important to understand the pros and cons before deciding if a Group RESP is right for you.
Group RESP Pros:
- Group RESPs offer a number of tax advantages. Contributions to a Group RESP are not tax-deductible, but the growth on the investment is tax-free as long as it is used for education expenses. This can be a significant benefit, as the cost of tuition and other education-related expenses can add up quickly.
- Group RESPs often have lower fees than individual RESPs. Because the investment is spread out among a group of people, the administrative costs are often lower, which means more of the money you contribute goes towards the education fund.
- Group RESPs offer flexibility in terms of contributions. With an individual RESP, you are required to contribute a set amount on a regular basis. With a Group RESP, you have the option to make larger contributions on an irregular basis, or to stop contributing altogether if your financial situation changes.
Group RESP Cons:
- The biggest downside of a Group RESP is that you have less control over the investment. Because the money is pooled with other contributors, you don’t have the ability to choose specific investments. This can be a concern if you have a particular investment strategy or risk tolerance.
- Another potential drawback is that the money in a Group RESP can only be used for education expenses. If the beneficiary does not go to post-secondary school, or if they receive scholarships or grants that cover their education costs, you will not be able to access the money for other purposes.
- Finally, it’s worth noting that Group RESPs do not qualify for the Canada Education Savings Grant (CESG), which is a government program that provides additional contributions to RESPs. This can be a significant drawback, as the CESG can significantly boost the amount of money available for education expenses.
Example:
Let’s say that you and a group of friends have decided to start a Group RESP to save for your children’s education. You all contribute $50 per month, and over the course of 18 years, the RESP grows to a total of $40,000. When your child is ready to go to university, the entire $40,000 can be used for education expenses, tax-free. Without a Group RESP, you would have had to pay taxes on any investment growth, reducing the amount of money available for education expenses.
In conclusion, a Group RESP can be a great way to save for your child’s education, but it’s important to weigh the pros and cons before making a decision. Consider your investment goals, risk tolerance, and financial situation, and be sure to understand the limitations of a Group RESP before committing to one.
Other Consideration:
One other important thing to consider when deciding whether a Group RESP is right for you is the structure of the plan. There are two types of Group RESPs: a single subscriber Group RESP and a family plan Group RESP.
A single subscriber Group RESP is owned by a single person, who is responsible for managing the plan and making contributions on behalf of the beneficiaries. This can be a good option if you are the primary contributor and want to have control over the plan.
A family plan Group RESP, on the other hand, is owned by a group of people, such as a group of friends or extended family members. Each person in the group is responsible for their own contributions, and the plan is managed by a promoter, who is typically a financial institution or investment firm. This type of Group RESP can be a good option if you want to share the responsibility for saving for education with others.
It’s important to understand the differences between these two types of Group RESPs and choose the one that best fits your needs and goals.
Another thing to consider when deciding on a Group RESP is the investment options available. As mentioned earlier, one of the downsides of a Group RESP is that you have less control over the investments, as the money is pooled with other contributors. However, some Group RESPs offer a range of investment options, such as mutual funds or index funds, which can help diversify the investment and potentially improve the overall return. It’s worth taking the time to research the investment options available and choose a Group RESP that aligns with your risk tolerance and investment goals.
Takeaways:
In conclusion, a Group Registered Education Savings Plan (Group RESP) can be a great way for parents and guardians in Canada to save for their children’s post-secondary education. Group RESPs offer a number of tax advantages, often have lower fees than individual RESPs, and offer flexibility in terms of contributions. However, it’s important to understand that Group RESPs do not qualify for the Canada Education Savings Grant (CESG) and the money can only be used for education expenses. Additionally, with a Group RESP, you have less control over the investment and may have fewer investment options. Before deciding if a Group RESP is right for you, it’s important to carefully consider your financial situation, investment goals, and risk tolerance.
