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As most of my readers know I rarely have Guest Posts, but this article is very much in theme for my site. Read about the author at the end of this lengthy tome. Also remember there is lots of info on the Registered Education Savings Plan on this page.

Guest post for Canadian Personal Finance Blog 

Many parents have concerns about the cost of post-secondary education in Canada. They worry about how they will pay for their child to go to a university or trade school to expand their job opportunities.

This situation leads many families to set up Registered Education Savings Plans (RESPs). These accounts are one of the best ways you can invest in a child’s future. They allow you to make contributions that the government will partially match. And, this money can grow, thanks to interest.

When your child goes off to university, you can request payments from their RESP. These funds will help them pay for their education. 

Keep in mind that cashing out an RESP can be tricky. You’ll want to keep tax considerations in mind to maximize the funds your child receives. 

This guide will help you understand the tax considerations when withdrawing money from an RESP. 

What Is an RESP? 

You’ve been making payments to your child’s RESP for quite some time now. But, you might not be familiar with how it works other than that you make regular contributions.  

Let’s begin by defining some terminology. 

RESPs are accounts set up by subscribers (usually the child’s parents). Subscribers make regular contributions to the account. You can set up an RESP through most financial institutions. 

When the child (the beneficiary) goes to college, the subscriber may request RESP payments. The child uses these payments to help fund their post-secondary education. 

These conditions are how RESP works in a nutshell. But, it gets a little more complicated. Below, we describe the three major components of all RESP accounts. 

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Contributions

The subscriber saves money by making regular contributions to the account. Keep in mind that each RESP is different. Some require a minimum deposit. Some require you to deposit specific monthly contributions, whereas others let you make contributions whenever you want. 

Currently, there is no annual contribution limit. Over the lifetime of the account, however, the maximum you can contribute is $50,000. Just be mindful of how much you’re contributing to your child versus your own retirement. I love how Bridget Casey from Greedy Rates puts it when she says to “never sacrifice your own long-term financial security when saving for your kids.”

Grants

Grants are one of the significant perks of RESPs. They provide families with money that the recipient does not have to repay. 

The Canadian government matches a percentage of your contributions via grants. The Canadian Education Savings Grant (CESG), for instance, will match your contributions (see specifics here).

Additionally, there are other national and provincial grants available. For instance, the Canada Learning Bond (CLB) provides money to low-income families without the need for any contribution. 

Income

Income is yet another great perk of RESPs. 

RESPs are comparable to investment accounts. The contribution and grant money have the opportunity to grow. You can invest the money in stocks, mutual funds, bonds, etc. to earn extra income. 

When you have an RESP, you must determine how you want to invest your contribution and grant money. Some families choose to navigate the investment process themselves. However, a financial advisor is usually the best way to make smart investment decisions. 

Important note: RESPs are tax-deferred accounts. The grants and income money are tax-free until withdrawn. This exemption allows it to grow at a much faster rate. 

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Types of Payments

When you cash out an RESP, you’ll get the money as two separate payments: 

Post-Secondary Education (PSE) Withdrawal

PSE payments consist of the contributions the subscriber made. 

Keep in mind that contributions do not qualify for a tax credit. When you put money into an RESP, you are using post-tax dollars. 

This stipulation means that when you withdraw PSEs, no one has to pay tax on them. You request for PSE payments to transmit either directly to you or your child. Then, the student will use the money to pay for books, housing, tuition, and other relevant expenses. 

There is no limit on when you can request PSEs. You can request however much of your contributions whenever you want. 

Educational Assistance Payments (EAPs)

Unlike PSEs, EAPs consist of the money from grants and income. They aren’t your contributions, so they must transmit directly to the beneficiary. The beneficiary will have to report EAPs as taxable income. 

In the first year of schooling, there are EAP limits. See here for exact specifications. But generally speaking, students have a limit of $5,000 in EAPs for their first 13 weeks of schooling. After that, there are no EAP limits. 

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RDSP : Quick Points

Tom Drake interviewed me a while ago, and we were going to chat about the RDSP (Registered Disability Savings Plan). We did end up mostly talking about the Disability Tax Credit (DTC), but it was still a very fun time for me. Whether Tom enjoyed it, remains to be seen.

I offer you up my notes, that I attempted to use during the interview, they are a bit scattered, but still informative, I hope.

Social Insurance Number

A social insurance number is a must for most government programs.

  • Whoever is involved in this, must have a SIN (and be a Canadian Resident). First thing to do, and these days it is usually applied for when a child is born.

DTC

The Disability Tax Credit is the cornerstone of the whole thing. Without it, you are not disabled (in the eyes of the Government).

  • You can do nothing with an RDSP until you have a DTC . The Disability Tax Credit (DTC) is granted by the CRA. 
    • Typically you apply for it, outside of your normal Tax return
    • This must be a severe and prolonged disability that disrupts the persons day to day life in a significant way.
    • It can be granted on a temporary basis and may need to be reapplied for, which we have done for my son, and will have to do again.
  • The RDSP can only be opened once the CRA grants the DTC (and yes they can deny it at a later date, depending on things).
  • You can do it yourself, don’t use the “helping firms” out there. So many different medical folks can help with this (e.g. Nurse practitioners)

RDSP Overview

What is a Registered Disability Savings Plan? Lots of parts to it.

  • The government has designed this as a very long term savings plan (until someone turns 60 is the goal). Employment and Social Development (ESDC) are the policy setters for the program. Check their web site for information.
  • A program’s maximum contributions over the life of the RDSP,  $200K
  • The total grants paid per year will be $3500 and a total of $70K throughout the life of the plan.
  • The entire program’s maximum age for someone to apply for an RDSP, should be 49 years old, since at 59 they can no longer contribute to it.
  • The plan can start paying out at age 60.
    • It can pay out earlier in extenuating circumstances 
    • The RDSP turns into a Specified Disability Savings Plan, when someone has a Doctor write a medical certificate stating that the payee will most likely die with in the next 5 years.
  • These funds in the RDSP should not be part of any Bankruptcy. I have been assured by the ESDC that this is the case, however, the bankruptcy law does not mention Registered accounts in general and the RDSP in specific as exempt.

Opening an RDSP

  • Who offers something other than a Bank Mutual Fund based RDSP? Currently most banks offer versions of the RDSP, however, few offer much flexibility.
    • TD Waterhouse (Directline) is where I currently invest. It offers complete flexibility in terms of where money can be invested (e.g. ETFs, Stocks, GICs, etc.,)

Grants

  • Typically the grants offered are based on the parents income, until the child turns 18. After that the level of grants will be based on the childs income
    • Canada Disability Savings Grant (CDSG) is a response to a deposit in the account, the amount of the grant (and the maximum value for the year), is set every year in the Statement of Entitlement.
    • Canada Disability Savings Bond (CDSB), an amount paid yearly into the RDSP for extremely low income beneficiaries. If you have low income, and RDSP is still a good option for long term savings.

DTC Revocation

If the beneficiary loses their DTC, a new rule has been added in the past year that does not force them to collapse their RDSP, they can hold onto it for now, while they reapply for the DTC.

LDAP

Lifetime Disability Assistance Payment is a payout from the RDSP to someone who has reached the age of 60. This is how the money is normally dispersed from an RDSP.

DAP

You can withdraw money from your RDSP before you turn 60, however, it is not encouraged.

  • Disability Assistance Payment, is a withdrawal. It is a payment made from an RDSP to the beneficiary or their estate.
  • DAPs typically will have AHA involved, as penalties, for early withdrawals.

SDSP

This is one of the instances where money can be taken out of an RDSP early.

  • Specified Disability Savings Plan (SDSP) happens when the beneficiary has a short life span (less than 5 years), and this must be certified by a Medical Practitioner (Doctor or Nurse Practitioner).
  • This is reversible, however, there is a lot of work that needs to be done in that case.

PGAP

Primarily Government Assisted Plan is an RDSP where most of the funds contributed to it, was from the Government. This RDSP scenario has many rules about early withdrawals (which can happen, but may not be worthwhile).

AHA

These are the penalties for taking money out early.

  • Assistance Holdback Amount, the penalties paid if someone attempts to withdraw money early. Typically it is $3 for each dollar withdrawn, up to a maximum of the amount of Grants paid into the RDSP for the past 10 years. 
  • In the case of a PGAP, there are even sterner rules.
  • There is a methodology for getting funds out earlier than at age 60, but it is quite complex, and assumes a 10 year plan before doing the withdrawal.

British Columbia Autism 

Milburn Drysdale’s site is the go to for RDSP information, especially if you live in BC.

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MER : A Worm in the RESP Money Tree

The RESP can be like a Money Tree for parents (and children) wanting to save for  post-secondary education.   If you invest your money you can get:

All of this free money is there for the asking. Truly it is like having a Magic Money Tree, however, as with all orchards, you can lose some of your fruit due to  worms.

In this case the worms can be:

  • High MER (Management Fee) Mutual Funds, many of the time they are hidden under the guise of Balanced Funds.
  • Badly performing Mutual Funds, usually pushed by an “Investment Person” who is making money on the purchase.
  • Very low interest paying saving devices (e.g. Bond Funds, Money Market Funds, GICs and HISA).

These financial worms chew into the potential growth of your RESP. Remember that most RESPs can have about a 23 year lifespan. The government stops adding money after the child turns 18, but  the  money  can continue to  grow for  a while after that, unless the  worms get in there.

When I opened my kids’ RESPs (more than 23 years ago), I didn’t know much about investing, so I spoke to my Canada Trust “Investment Person”. This person warned me that this was a short-term investment, where I didn’t want to risk losing money, so I should put the funds in safe Mutual Funds. I didn’t know so that is what I ended up getting was a small amount in a Balanced Mutual Fund (MER 2.8%) a larger amount in a Bond Fund (paying 1.2%) and a Money Market Fund (which paid 0.9%).

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As time passed, I learned more about investing, and started looking at my TD Mutual Funds (CT had been bought by TD), and saw the High MER I was paying. I read about the E-series Funds from TD, saw they had low MERs, so I went to TD to ask how to  transfer to  these Mutual Funds. You would have thought I was about to fall into an abyss, the way the investment person reacted, but I was not to be dissuaded. I got all the needed forms and changed the RESPs so that I could purchase the E-series funds.

I changed my investment mix, to be more like my other Index Fund portfolios, while still holding all grant money in safe(r) funds (i.e. Money Market funds). I didn’t want to lose the grant money, so I figured they were safe in a Money Market fund (which is wrong, Money Market funds can lose value too).

I lost a great deal of possible growth during that time, to High MER funds and badly chosen Mutual funds as well.

Don’t let the worms eat away at the growth of your RESPs.

BCM 2020

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I have written many times about if you don’t ask the answer is always no, but the title of this post is also a good turn of phrase. Too many times folks feel they have no one to ask for help, so they just give up. Most of the time that is exactly what service companies want you to do.

Many times return procedures are convoluted, complex or just downright silly, but it is to stop you from returning things. If you keep it, but don’t want it, they have won.

A good example is, if you want to use TD E-series mutual funds, inside your TD Mutual Fund account, it is not an easy procedure. You must apply via a written form, and wait for the “OK” from them to be able to buy them. Once you are granted permission, you then must figure out which funds are the E-series funds. If you wish to cash the E-series Funds out of the account, you must first go on-line, transfer them to a Money Market account, and then go into a TD Branch, to do the cash out?

The best way to deal with this, is simply don’t use the TD Mutual Fund vehicle. Other reasons to be wary, will be the Risk Profile trade cancellation issues.

This example shows that the system seems to be set up to discourage you from doing what you want. Worse, to do nothing, when you should be rebalancing or other important investment tasks.

Why Not Ask?

This is the question. If you do not ask for what you want, you will rarely get what you want. You may sound like a pest, you may upset whoever you are dealing with, so be polite, but ask for what you want. The worst they can say is, No.

Not Asking is Rejection by Default

Unknown, but words to live by

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To all the Fathers out there, I wish you an early Happy Fathers Day (never sure where the apostrophe goes here). I am lucky to be a Dad, and also a GrandDad but just hoping for a quiet Sunday.

As I have said before, most Dads will be happy to hear from you however way you wish, and just want to know you are Safe and Happy. During these more interesting times, that is truer than ever.

So, that COVID thing seems to have been a big scam eh? Like President Trump said, it would go away, if we stopped testing, much like my debt would go away, if I stopped looking at my bank balance? In Canada, we seem to be doing OK, but I have guarded optimism now. I am certainly glad my dentist is seeing folks again (having an infected tooth is another exciting part of the lock down).

With Ontario (except Toronto) opening up, but the US border staying closed, we may do OK, but it might be a little early for optimism.

I have spent this week unsubscribing from over 50 email newsletters that have been bombarding my inbox. The actual number I think is higher, and I will be on it for a while. I have a new credo to live by.

If I delete an email twice in a row (BEFORE reading it), I must unsubscribe from it.

BCM Quarantine 2020

I would wake up and have over 200 unread emails each morning (after cleaning my inbox the previous evening). This needs to be changed, so a new project was born. And I still do not allow cold call Guest Post requests either.

Inflation is negative for a second month? Interesting numbers but all must be taken with a grain of salt for now.

Inflation (year over year May 2020) -0.4 %
Bank of Canada Overnight Rate May 21st0.25%
Unemployment Rate (as of May 2020)13.7%
GDP Growth (Q1 2020)-2.1%
Population of Canada (Jan 1, 2020)37.894 Million
CIBC current prime rate2.45%
BMO current prime rate2.45%
Scotiabank prime lending rate2.45%
TD prime lending rate2.45%
Tangerine prime lending rate2.45%
Some Useful Financial Data for Canadians as of June 19th

Past Writings

Somehow I have managed to get “busy” and haven’t written much lately. The summer has arrived at least? Having health issues at the same time, does kind of distract you.


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More Financial Writings for Dads Everywhere

Fathers Day will be different for many of us. Should you visit? Maybe a Video Visit? Either way, your Dad would love to hear from you (in most cases). My Dad has been gone a while, but I still think of him often.

Debt to Disposable income
Household credit market debt to household disposable income, seasonally adjusted

Tweets of the Week

I follow the OPP East Region mostly to see these kind of tweets. There is a lot here, but it is as close to “speed shaming” as we can go in Canada.


Would I be showing my age, if I said I remember seeing this on its first run in the 70s?


Videos of the Week

Preet has been pumping out video content about all the new COVID19 programs, and here is another good one. CERB goes on, as does his luscious beard?


Random Thoughts from the Past

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