Really Useful RESP Tips

A while back I was “interviewed” for an article that was supposed to appear in the Toronto Star, and you will be happy to hear that I am turning over a new leaf when being interviewed, I actually prepared for it!

RESP Piggy Bank

RESP’s Are Savings For Your and Your Child’s Future

Previously, if during interviews it sounded like I was talking out of my hat, I was, but things are changing. What happened to the article with the Toronto Star about Registered Education Savings Plans (RESP) I have no idea, but let me give you some of my notes that I had prepared, along with some links to some of my own thoughts on the subject.

  • Remember that there is a $50K Lifetime deposit limit
  • If you only deposit $2500/year, you will be under that limit, so maybe start with a larger lump sum to give it time to grow ?
  • If you miss giving up to $2500 one year, you roll $1000 of that limit to the next year
    Canada education savings grant (CSEG) is typically 20% up to $2500 deposited (can get higher for lower-income families)
  • If one child doesn’t use the money, you can transfer it to other children under the age of 21 (without penalties), but still can be transferred to blood relatives older than 21 ( there will be penalties there).

CLB – Canada Learning Bond

  • Little or no money needs to be deposited to get this, an initial $500 gets put in even if no money is deposited. Most banks are leary to do this, but talk to SmartSaver.org and they will help set things up (in the Toronto Area)

General RESP Advice

  • Start early, get your child a SIN, and maybe start with a larger lump sum to get things going (longer it has to grow, the better for you, remember the rule of 72 ).
  • If I had a chance to do it over again, I’d use a Self-Directed non-mutual fund bound system like TD Waterhouse, Questrade, BMO, etc.,
  • Beware programs that might have penalties on the principal, yes the CESG and CLB can have penalties if the child does not go to school, but you should get the money deposited back (and pay tax on the growth)
  • Invest in a simple couch potato portfolio with Index Funds or Index ETFs, no need to be aggressive here.

Tuition Costs

  • Acadia cost about $3800/term Trent is about $3500/term, so your RESP isn’t going to be able to deal with much more than Tuition costs, there are many many more costs associated with school.
    Most schools will show estimates of how much a typical year might cost (U of Waterloo, Trent and Queens do).

Alternate views

  • A lot of folks think their kids should pay for their education, but even if you only put $50 a pay in, it might help your kids start out? It is free money from the government.

As usual you can peruse my Registered Education savings Plan web page, which has a large amount of information on the topic. If you are interested in interviewing me see the About section of this site for details on this.

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Smartsaver.org RESP: Helping Lower Income Families

Robb Engen from over at Boomer and Echo sent me over an interesting e-mail for a new concept backed by most major banks (and credit unions) in Canada to help children of lower-income Canadians take advantage of the Canada Learning Bond (CLB)  in the Registered Education Savings Plan (RESP) .

To quote :

More than 1.4 million low-income children don’t receive the government education funding they’re eligible for because they don’t have a Registered Education Savings Plan (RESP). In fact, in Ontario, only 31% of children who qualify for the Canada Learning Bond (a contribution of up to $2,000 towards future education) – have received it. Launched today*, a new online application at www.SmartSAVER.org is designed to help Canadians open RESPs and access the Canada Learning Bond for their children.

*- where today was January 26th, 2015

While these numbers don’t surprise me, they do worry me, because my opinion is education empowers folks, and gives them choices. The more money lower-income families can accumulate to help their kids have the chance to attend post-secondary programs, the better it is for the economy.

The official announcement from The Omega Foundation states:

In a joint initiative, BMO, Meridian, RBC Royal Bank, Scotiabank, TD and Vancity have come together to support SmartSAVER, committing to establish RESPs for lower-income families with no fees and no minimum contribution to help them access the federal government’s Canada Learning Bond. Families can apply for the Canada Learning Bond through SmartSAVER’s online application form in less than 10 minutes and choose any of the six participating credit unions and banks to establish their RESP with $0. The user-friendly application is supported in five languages (English, French, Spanish, Mandarin and Punjabi).

From what I can read the SmartSaver looks to be very helpful for lower-income families, that Banks will overlook (in terms of RESP clients):

SmartSAVER makes it easier for you to start an RESP and receive the Canada Learning Bond by only working with RESP providers who provide the most flexible kind of plan: an individual RESP that has:  No account set-up, enrolment or annual fee; and No minimum contribution requirement.

Graduates Moving

A Post-Secondary Program Gives Kids Options in Life.

So the service helps lower-income families with kids at least have access to the CLB funds available to them, without having to make any deposits, which sounds like a good idea (to me). Even if the families could spare $10 a pay to put money into this, there would be a great deal more money available, to allow their kids to have a choice to go to post-secondary schooling or not. If the family is unable to put any money into the account, they will continue to accumulate funds, from the CLB.

The program has been running as a pilot in Toronto, so this is an expansion on that initial start up project. Many interesting things were learned from that program including the fact that many bank branches and their representatives were not even aware of the CLB (I can attest to that problem, I ran into it myself at my local TD Branch).

I note there are no claims about growth and any of that, simply a statement that the program is to help folks set up RESPs to get access to the CLB (and any other funds that are available to lower-income families). My wife tried out the interface and was impressed with how it all worked as well (as I said we already have RESPs, and I don’t think this program is aimed at me).

This looks to me like a good program, that will help many more folks get the funding they need to empower their kids, and give them more options in life.

BCM Caveat: with this (and all financial programs)  it is important to read the Terms and Conditions on the web site, always make informed financial decisions.

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RESPs are too Hard for Mommies

This is what I keep seeing and reading, and it makes me (as a father of 3 smart, sophisticated young ladies, and a wife who is much smarter than me) absolutely irate. The dumbing down of most things (OK everything) is annoying enough, but the portrayal that Mothers and Parents (in general) can’t understand a simple financial idea like an RESP is insulting.

The case in point I am displeased with is Giraffe and Friends RESP, which is an insurance company that is offering a Guaranteed Growth RESP (and also insurance for children). This company has been getting a lot of Mainstream Media play and many financial bloggers seem to think that it is a godsend for families.

Giraffe

What’s an RESP?
Photo Courtesy kraifreedom at FreeDigitalPhotos.net

Let me be clear, “Giraffe Feces“.

They are simply selling an RESP Bond Fund, with insurance thrown in, which most families can easily set up themselves.

When did RESPs get complicated? You get a Social Insurance Number for your child, and you set up the RESP with your favorite financial institution, you do a little research, beforehand and there you have it. Evidently it is much more complicated than that, as the Giraffe and Friends site explains:

We use direct, simple language. We take the worry out of big decisions by giving you all the information like our frequently asked questions you need to make the right choice for your family. We want you to understand how your savings work so you can feel confident, not confused. giraffe & friends is online, and our mission is to be so easy that you can set up your child’s RESP during a single naptime.

Is it just me, or is this someone being condescending  to the consumer? When I read “…simple language…”, I get the feeling someone is calling me Simple (but then again, I am also known for being a hot-head).

Another question that arose after seeing this was when did RESPs become risky? The site makes the statement:

A giraffe & friends RESP is for parents who don’t want to take chances with their children’s education savings. There’s enough uncertainty in the world.

  • Your personal savings are 100% guaranteed to grow, no matter what happens out there in the stock market jungle.
  • We go a step further by offering insurance for YOU, the parents. So if the unthinkable happens like a death or permanent disability, and you can’t make your RESP contributions, giraffe & friends will still meet your RESP goal.

What kind of growth are we talking about here? I couldn’t really find a lot of information about what growth meant, but the guarantee seems to be a 2% growth per annum, but given the government kicks in 20% every year in CESG, for your first $2500 deposited each year (more possible depending on your income), is this on top of the kick in? (I hope so).

To those folks out there clutching their stuffed animals reading this, you do realize you can buy GICs, or set up a savings account type RESP that will never lose money as well, right? The FAQ on the site says they invest your money in Bonds mostly, ” We back your RESP with dependable Canadian government and corporate bonds as well as a small percentage of equities.“, you know you can buy Canada Savings Bonds in an RESP too?

The really telling part of the web site is in the Terms and Conditions page, which states:

Except for on-line applications, the Website is provided for informational purposes only, and is not guaranteed to be accurate, complete, or timely. You should obtain appropriate, qualified professional advice before acting or omitting to act based upon any information provided on or though the Website.

It is also important to read the Exclusion of Liability section very carefully as well (as you should with all similar products).

Am I missing something here, is the concept of an RESP something that is causing parents to stay up late at night worrying that they don’t know what to do? I must also give Mrs. C8j her “props” on this, as this article was her idea, and, yes, she does feel insulted by the tone of the service.

Maybe I need to start the Friendly Big Cajun Man RESP fund, and I could get Jerome the Giraffe and Rusty the Rooster to help explain things to folks?

Look up… waaaay up… and now let’s talk about RESPs….

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TD E-Series RESP Beartrap

Just when I thought I couldn’t possibly find anything more to write about with my kids’ RESP account, TD puts a beartrap in the process and I end up with yet another article to write.

I can already hear my regular readers muttering, that I am not going to rehash another visit to my local TD Branch, am I? Yes, and no (after a fashion).

Let us rewind to about 4 months ago, when I changed all of my TD Mutual Fund savings vehicles, into accounts that allow for the purchase of the TD E-series Index Funds. Remember I did outline in Quicken and transferring E-series Index Funds, how to change from the I-series funds to the E-series versions (which have lower MER fees), little did I know that with that change, I set the beartrap, that I stepped on Friday evening.

E-series bear trap

It snapped shut tight

I went to my local branch of TD Friday because my youngest daughter’s tuition fees were due, so I made my appointment at my local branch last week, to extract the money I need to pay for this term, because, as we know, you must go in to a local branch to prove your child is in a reputable program (for an RESP), before you can have the RESP funds. I had my letter, I knew what part of the portfolio I wanted to liquidate, so what could go wrong?

I arrived at the branch, and I was dealing with a polite young man, that I had dealt with previously, I explained quickly what I wanted, and he logged in and started clicking and typing. Time passed, screens seem to fly by and then return and I started to wonder, “What is wrong?”.

After about 10 minutes the gentleman turned to me and said, “We have a problem here”. At that moment, the bear trap snapped shut on my ankle.

The “Advisor” then explained that the in-branch Financial Advisor/Mutual Fund persons are not allowed to touch E-series funds. I believe my response was a confused but polite, “I beg your pardon?”. The young man went on to explain that he could only trade the I series funds, but that the E-series funds were out of his “jurisdiction”.

At that moment I almost asked, “So I have a Save only account?” (i.e. I am allowed to put money in, but not allowed to take any money out). Luckily that is not quite the case, however, there is yet another convoluted methodology that I must follow to extricate funds from my daughter’s RESP. Let’s just wander through the steps:

  1. Get a proof of enrollment letter from the post secondary school she is attending. Luckily I already had that from September
  2. Make an appointment with the local branch to do an RESP withdrawal. This is so someone trusted at TD can attest to the letter that you got in the first place (hint for TD, maybe I could have the letter sent to YOU or faxed?).
  3. NEW: Go on-line to my TD Mutual Fund account, and move the funds I want, into a TD Money Market account. This is a fund that the Mutual Fund expert or Financial Advisor can do something with. Do this at least 2 days before you go to the branch (to allow the transaction to go through).
  4. Go into the branch and spend 1/2 an hour answering questions, and possibly having to review your investing profile, but eventually put through the transactions to cash in the funds you want.
  5. Wait for the funds to arrive on-line

I would have thought (if you have wandered through my RESP page) there was no other way for this to become a more complicated methodology, unfortunately, I was wrong.

As an epilogue to Friday, I also asked what would happen if my RESP was with TD Waterhouse (in hindsight what I should have done in the first place)? It becomes more complicated, and at the end of your visit to the local branch, you must then wait for TD Waterhouse to release the funds to you (so you need to wait longer for it).

I must now return this Wednesday to attempt the same thing I attempted back on Friday.

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RESP from Start to Spend

I supply the following scenario as a simple example to show how RESPs can work, and include some advice from my experiences using the program.

Registered Education Savings Plan (RESP)

So, now you have had a baby, and you are sure that your child will be a Doctor one day, or an Engineer, or maybe a Plumber? If you are thinking this, and you want to help them meet this goal, by helping financially, you might want to start working on saving money, and luckily (in Canada) the Government is kind enough to have set up the Registered Education Savings Plan (RESP).

What is your first step? Get your child a Social Insurance Number (the day after they are born, would be a useful time to apply, given how busy you will be in the days after that).  Get that done, right away, or you will have to start waiting, and time is your friend at the beginning of this process, but don’t procrastinate, you are wasting valuable doubling time, if you do.

Next step, go set up an RESP with whomever you feel comfortable dealing with, or whomever gives you the best deal (Shop Around, don’t just use your bank because it is convenient). Check the RESP page for my experiences, and I would recommend try to stay away from Bank Mutual Fund accounts, give yourself enough freedom to use some simple Couch Potato Portfolios to invest your funds (remembering you have a relatively short period, and shouldn’t be too risky either, as you don’t have a lot of recovery time in your investment plan).

Now we have reached the part where you make your money start working. I am assuming that currently your family income is over $87,123 and that you can invest somewhere that will give you an average of about 4% growth per year. The big assumption is that you contribute the current maximum every year to the RESP $2500. What does this look like? Funny you should ask, I have a table right here for you:

Year Principal Contribution CESG Growth Year End Total
1 $0.00 $2,500.00 $500.00 $0.00 $3,000.00
2 $3,000.00 $2,500.00 $500.00 $120.00 $6,120.00
3 $6,120.00 $2,500.00 $500.00 $244.80 $9,364.80
4 $9,364.80 $2,500.00 $500.00 $374.59 $12,739.39
5 $12,739.39 $2,500.00 $500.00 $509.58 $16,248.97
6 $16,248.97 $2,500.00 $500.00 $649.96 $19,898.93
7 $19,898.93 $2,500.00 $500.00 $795.96 $23,694.88
8 $23,694.88 $2,500.00 $500.00 $947.80 $27,642.68
9 $27,642.68 $2,500.00 $500.00 $1,105.71 $31,748.39
10 $31,748.39 $2,500.00 $500.00 $1,269.94 $36,018.32
11 $36,018.32 $2,500.00 $500.00 $1,440.73 $40,459.05
12 $40,459.05 $2,500.00 $500.00 $1,618.36 $45,077.42
13 $45,077.42 $2,500.00 $500.00 $1,803.10 $49,880.51
14 $49,880.51 $2,500.00 $500.00 $1,995.22 $54,875.73
15 $54,875.73 $2,500.00 $200.00 $2,195.03 $59,770.76
16 $59,770.76 $2,500.00 $0.00 $2,390.83 $64,661.59
17 $64,661.59 $2,500.00 $0.00 $2,586.46 $69,748.06
18 $69,748.06 $2,500.00 $0.00 $2,789.92 $75,037.98
Totals $45,000.00 $7,200.00 $22,837.98
Assuming 4% Growth
Assuming family income over $87,123

Amazing watching money grow like that isn’t it? Did you look closely at the table? Did you notice that the current CESG max for you is $7200, so once you reach that maximum, you won’t get any more CESG kick ins (for now, given time, all these max values for contributing and CESG may change). Also remember that once your child turns 18, you would get no more CESG kick in either.

Remember that the Growth and CESG funds, will be taxed, in your child’s name, (from the example $7200 + $22838)  so figure out how you wish to extract money from the account once your child goes to Trade School, University, College or any of the other Ministry Approved post secondary programs, to minimize any tax impacts on your child. This can get tricky if your child is lucky enough to work in a CO-OP Program.

You should also realize, that if your child leaves home, this will only really cover tuition and fees.

 

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