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The expert

Jay Nash

Jay Nash, vice president and portfolio manager, Roberts Nash Advisory Group, National Bank Financial, London, Ont.

Client profile

William, 39, and Teresa, 38, are married and live near the Alberta oil patch. They have twin girls aged 10. William is 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, so from 2008 to 2012 they were unable to make contributions.

William’s business has recovered, so he and Teresa are ready to resume saving. They’ve hired a financial advisor to help.

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

Read: Up the risk in TFSAs

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.

6

Degree of difficulty

6 out of 10. The toughest part is deciding what to do with the residual amount in the group RESP. The complexity of these plans, and the fact that firms typically deal only with clients, make identifying the best option a challenge.

Creating an investment strategy for the remaining contribution period is easier. Tax-efficiency isn’t an issue because the funds are sheltered. But the limited time horizon curbs the types of investments the clients can take on.

The advisor has to determine what to do with the $2,200 in the group plan and formulate a new savings plan for the next eight years, before the girls go to university.

The solution

For the residual amount in the group plan, the couple could either pull the money out now, or wait to withdraw when the kids enrol in university.

Jay Nash, a vice president and portfolio manager with National Bank Financial, notes these plans’ terms are highly complex and vary from company to company. Account statements can be difficult to decipher. Also, group RESP firms prefer to deal directly with clients—not their advisors.

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“In some cases there are ongoing administration fees on top of the enrolment, 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.”

Next, the advisor needs to create a strategy to fit William and Teresa’s objectives and shorter time horizon.

Nash suggests tapping 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.

Any additional money they want to set aside for the twins’ educations should be placed in TFSAs, which are less restrictive. With an RESP, they can only withdraw $5,000 in the first 90 days of the drawdown period. This amount may cover tuition, but the girls could incur other expenses, such as residence fees and meal plans. William and Teresa can place the remaining savings in their TFSAs.

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A_CANADIAN_EH

(1) The column clearly implies that $5,000 is the limit on the available cash flow from the RESP during the first 13 weeks and that this could lead to cash flow problems for the beneficiaries relative to their expenses. I repeat, this $5,000 limit is wrong and misleading as reported in the article.
(2) Of course it is generally beneficial to draw EAP as soon as possible…this is a completely irrelevant point in the case study…they are already withdrawing the maximum $5,000 EAP
(3) Withdrawals in excess of $5,000 as PSE have absolutely no potential reprecussions from CRA. Capital does not have to be applied to education expenses. The only potential reprecussion is if more than $5,000 is drawn as EAP…if the clients are concerned about that kind of error occurring then I suggest they maybe need a new (competent) financial advisor.

Thursday, Jul 25, 2013 at 1:57 pm Reply

DEAN.DISPALATRO.1

Thanks for your feedback. We spoke with our expert, who suggests the following:

The comment is accurate in that Post-Secondary Education Contribution Withdrawal (PSE) can be made in addition to the EAP’s. For the majority of clients it is in their best interest to withdraw as much of the EAP as possible right from the beginning because in the event of a child not continuing with their education these funds will be taken back by the government.

There are limitations on this amount in the first 13 weeks and withdrawals in excess of this amount could heighten the possibility of errors and repercussions from CRA. The recommendation to maximize the RESP and then put funds into a TFSA stands, but the stated limit for the drawdown period was out of date.

Thursday, Jun 6, 2013 at 11:55 am Reply

A_CANADIAN_EH

Please check your facts. The $5,000 limitation during the first 13-weeks (or 90 days as you phrase it) applies to Educational Assistance Payments (EAP) only. EAP are made up of Canada Education Savings Grant and earnings – there is no limitation on the withdrawal of the capital that has been contributed, so in practical cash flow terms the $5,000 limit is a meaningless number.

Wednesday, Jun 5, 2013 at 4:40 pm Reply