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RESP: Free Money Folks

Found this classic from many years back (2006). Added a bit of spit and polish and updated the data as well. To get more information and more about how I used the RESP Program, see my RESP page.

For those of you who don’t know about the RESP program (and are Canadian of course) you need to learn about it. It is for folks with kids under the ages of 17. This program is free money from the government for your kids to go to post secondary training program. It is not just University programs, college programs and post secondary technical programs also fit into this. As always, do the research about the programs covered.

The CESG

For up to $2500 you put in every year the government will kick in a percentage of their own depending on how much money you make in the year:

  • If your family income is greater than $98,040 or so, you get a 20% one time kick in from the government. This means if you put in $2500, it turns into $500.00 within 3 months
  • If you make less than $98,040, there is even up to $550 to be had in CESG (Canada Education Savings Grant)
  • If you make less than $49,020, there is $600 available

The maximum CESG for each individual in the plan is $7200.

The Canada Learning Bond (CLB)

…provides an additional incentive of up to $2,000 to help modest-income families start saving early for their child’s education after high school (post-secondary education)

Canada Learning Bond (CLB)

The CLB is available for children from low-income families born in 2004 or later and provide an initial $500 for the first year the child is eligible, up to age 15, plus $100 for each additional year of eligibility, up to 15 years for a maximum of $2,000.

RESP is After Tax Money

So the catch is that an RESP is not like an RRSP, in that the money put in is treated as after tax money. You don’t get to write it off your taxes, like an RRSP. Your kids also have to go into a recognized post secondary training program, or you lose the one time grants as well. However, these things are TRANSFERABLE to other children and even spouses, but they do have a set time period as well (but don’t take my word on this, READ first).

On the positive side, the program pays out in your child’s hands, so taxed at a lower rate (hopefully). The kids pay tax on any growth in the fund, the grants and the bonds added.

Go To a Bank and Open an RESP ?

Bank RESPs, will mean you put your money in Bank Mutual Funds exclusively. I did this, with Canada Trust, in 1992, but I wasn’t as sophisticated back then. My CT Mutual Funds, turned into TD I-Series Funds. These funds have MER’s of around 2%, yearly. I then learned about the TD E-series funds from the Canadian Capitalist. I transferred to those funds, and set up a good portfolio for each RESP.

You might do better setting up an RESP with TD Direct Line, Questrade or similar trading sites. You can then purchase whatever Index Fund or ETF you wish.

Even More on RESPs

Remember I have an entire page dedicated to the Registered Education Savings Plan.

Yeh, That is me, talking about RESPs and Free Money

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When to Put Money in RRSP

I have come up with a relatively straight forward heuristic on how to figure this one out.

heu·ris·tic adjective
enabling a person to discover or learn something for themselves.”a “hands-on” or interactive heuristic approach to learning”

Google Dictionary description

It is a simple trickle down or waterfall decision tree. Many times I get asked this question, or see it float by in other sites.

Personal Finance Waterfall

Where to Put Money Heuristic

  1. Pay off debt , it has the highest guaranteed pay back today.

    I mean all debt except perhaps your mortgage. A mortgage is your biggest debt, so my view is investing elsewhere, and not paying down your mortgage is a mistake. I have been told my opinion is very “old fashioned”.
    • This lowers your risk in life and gives you choices.
  2. Put money in your TFSA.

    My opinion is that this is a good place to put your money. How you invest it, is up to you. It should be within your Risk tolerances. Whether you want to buy stocks, Index Funds, ETFs or mutual funds is up to you. Do this in a trading account. In a trading account you can buy all those savings vehicles. In a Mutual Fund account, you usually can only buy Bank or Insurance company (read high MER) funds.

    TFSA until you reach your limit. You find that in your My CRA Account (limit as of start of current year).
  3. Do you have Kids? If you do, maybe it is time to think about an RESP? This could be, before (2). The Registered Education Savings Plan will help your child’s future. You may decide you don’t want to do this, so you could skip this step.
  4. Do you have a disabled loved one? Before step (1) you might want to think about an RDSP. A Registered Disability Savings Plan will help their future a great deal.
  5. Time to use your RRSP. It will lower your tax levels, so you should reinvest the money you get back into the RRSP, until you have no RRSP limit left.

    Sometimes you can’t use your RRSP, if you are lucky enough to have a Pension. This is a tragedy of riches, so don’t complain to your friends about it, or they might kick you in the shins.
  6. You have reached savings nirvana. If you are at this point where:
    • All your debt is paid off
    • Your TFSA limit is reached
    • Your RRSP is full
      You are now at the Zen level of life.

At this point in your life you have choices that most folks don’t have. Your Risk level should be quite low. Your stress level (due to money) should be non-existent.

This is your goal. Being out of debt, with money in the bank means you are financially in the right place. You can do what you want.

Am I Done ?

If you somehow get back into debt, restart the process. You did it once, you can do it again. Maybe create (say after step (1)) an Emergency Fund, in case something bad happens.

Is this easy? No, however, it is a good heuristic.

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RESP Only For the Rich ?

TL: DR: Rich folk use RESPs much more than the poor, counter to whom it was supposed to help.

Estimated reading time: 3 minutes

Stats Canada came out with a very telling survey titled, Why are Lower-income Parents Less Likely to Open an RESP Account? by Aneta Bonikowska and Marc Frenette. The findings are worrisome in that it points to the fact that the RESP seems to be a program used mainly by the wealthy(er) parents.

A telling quote from the Executive summary.

The results suggest that differences in wealth remain the single most important factor behind the gap in RESP participation by family income, even after accounting for differences in parental education and literacy, numeracy and financial literacy.

Why are Lower-income Parents Less Likely to Open an RESP Account? The Roles of Literacy, Education and Wealth

Many lower-income families are unaware that it can grow with the Canada Learning Bond even if they put no money into the program. The CLB can add up to almost $2000 (over the life of the RESP).

They claim that this is a Financial Literacy issue is a bit of a stretch, but possible. I think it is that Lower Income families are not aware of the CLB and other benefits (which I suppose is Financial Literacy). My guess is tellers at banks will not offer to set up an RESP for a “No Star” customer. The Up-Sell would be reserved for “good” customers.

A Graphic from Stats Canada Report about RESP and Lower Income Families
A Graphic from Stats Canada Report about RESP and Lower-Income Families

Conclusion

I guess the question is simple if Canadian Parents are barely making ends meet, will they put money aside for their kids’ post-secondary education? This report concludes, No.

I think I agree, but I’d like to know how to change that.

Ways to Fix This?

  1. Banks need to market this program to lower income families, and point out that there is Free money to be had. The Canada Learning Bond is that free money. I really doubt many banks will do this, unless they could make money doing it.
  2. Expand the Canada Learning Bond, so that there is more money for lower income families.
  3. Maybe a Government run RESP program, that is set up for lower income families?

Read more about RESPs. Click Here! The page is being revamped, so come back soon.

More on Canada Learning Bond

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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. 

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. 

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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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%).

As time passed, I learned more about investing. I started looking at my , now, TD Mutual Funds, 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. 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. We were wrong, Money Market funds can lose value too.

I lost a great deal of possible growth during that time. We lost it 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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