Understanding RESP's

I would like to take this opportunity to thank Catherine for the opportunity to write a guest post to her readers with a post on the topic of RESPs. No, Thank YOU for taking the time to do this for me! I hope everyone enjoys this great and very informative post!

For those of you who know me, I’ll apologize right now and say that this article will be somewhat “stolen” from my own posting with some extra juicy bits to help you get over your fear of the I-word.  (Investing).  Additionally I’ve removed *most* of my liberal dose of brow-beatings which you have become accustom to expecting.

Free Money?!

Now for the juicy part:  Do you want $7200 for FREE from the government for your child’s education?  Are you dirt-poor?  If so, you can get another $500 + 100 per year (for up to 14 years) you continue to be dirt-poor for doing absolutely NOTHING!  Now you don’t have to be dirt-poor…  You can be working poor.  Or you can just be poor from an income-tax perspective like me.  (Self-employed with carefully thought out expenses)

So how do you do this?  It involves opening up a couple of RESP accounts for your child.

What is an RESP?

It’s not a scam.  You’re not giving any money to the government.  The government is GIVING YOU MONEY.  RESP stands for ‘Registered Education Savings Plan’.  Which already sounds less scary.  But due to the complete and horrible lack of investment education in Canada for all of you “pre-investors” the name is only partially misleading.  It can be more than just a pedestrian savings account.  (And needs to be because savings do not keep up with inflation!)

Lets get down to basics: the RESP is an account or many accounts with a named beneficiary.  (Your child)  If the word “account” scares you too, then just think of it as a shoe-box, but for money for your child’s education.  So no shoes.  Just cash, GICs, mutual funds (which I hate), ETFs (exchange traded funds – which are better), stocks, bonds, and more.

What Does the Registered Part Mean? 

It just means that there are rules that govern the tax implications of the money in the account.  In the case of the RESP, it means that there is a way to get the money out with NO tax consequences to you (the parent.)  When you need the money to send your child off to school, the monies withdrawn from the account(s) will be taxed in the hands of the child, and since they will be a full-time student and earning ZERO or next to zero then they will be in the lowest tax bracket.  Additionally there are tax credits for tuition so pretty much every cent you need will be tax-free.

As for the “education” portion of the term RESP that’s pretty straight forward.  The money is for your education, be it tuition, dorms, meal-plans etc..  The “savings plan” portion is strangely enough NOT as straight forward.  You can have INVESTMENT accounts as part of your child’s RESP.  You can have multiple accounts too.  Heck, your parents (the child’s grand parents, or aunts, uncles, whomever) can ALSO open accounts for your child!  (You might suspect this is happening if they ask you for your child’s SIN number).  There is only one concern though… there is a LIFETIME maximum contribution limit to the RESP.  So the aggregate of ALL RESP accounts for the one beneficiary can NOT exceed $50,000.  How many of you will this effect?  Probably not too many if you’re reading PF/debt blogs.  NB: (RESPs can be “individual” – one per child, or “family” which is one for all your children.  The family plan risk could mean that one child could potentially deplete the account entirely if they decide to go to,say, Harvard; leaving the remaining children recycling cans to fund their tuition.)  If you only have one child or like keeping things compartmentalized for your brood, than individual is an excellent choice.

Beating Inflation

Now, as for getting on the investing band-wagon, I could prattle on and on and on and on about why…  And I will a little bit right here:  If you put money in a savings account, you will lose money to inflation.  You won’t lose the number of dollars, but those dollars will buy less when you need them in 15-20 years depending on the age of your child/children.  So how do you beat inflation?  I could recommend a few things, but that would set you up for a lifetime of not doing your due diligence, taking “hot-tips” from strangers, losing your shirt and getting bitter about it.  It’s also beyond the scope of this posting since I don’t want you to get bored and stop reading.  (ok ok… here are some great ETFs that hold Canadian bonds, Canadian banks, and mostly Canadian real-estate respectively: XBB, ZEB, XRE)

So how do you get that $7200 I promised? 

The government pays you a 20% matching grant called the Canada Educational Savings Grant (CESG) to a maximum of $500 per year to a maximum of $7200.  So you have to contribute $2500 a year ($208.33/m) for 15 years.  Yes that sounds horrible, but start the INSTANT your child is born.  My son just turned 2 in October, yet his RESP has been open and collected the grants from 2010, 2011, and 2012.  (And soon to collect the 2013 grant).  Why is this important?  Investing is all about time so the sooner you start the better.  If you didn’t start right away, that’s ok.  They do offer retro-active funding for up to 2 years.  So contribute $5k all at once and they contribute an extra $1000 within a month or two.

I Have No Money Though…

Now if you’re dirt poor and can’t come up with this kind of money, it’s always easy to ask grandparents or rich aunts/uncles.  What do I want for Christmas?  I want to fund my son’s RESP.  Grandparents and other family are far more likely to just fork over the cash to fund this rather than leave the money in your sticky fingers!

Additionally for those of you who are dirt-poor, if you receive the “universal child credit” then you qualify for the Canada Learning Bond (CLB) which is a $500 + $100 per year you remain in the low tax brackets.

Caveats:  to properly work your money you will want your own discount brokerage account.  This way you don’t get gouged by horrible brokerage fees, group plan fees, nor do you get forced to buy crappy mutual funds that won’t do you any good.  BUT, since those of you who have enough money to open discount brokerage accounts typically do NOT fall into the “poor as dirt” tax brackets they generally do not have the facility to do the paperwork to collect the CLB.  But any of the big banks do.  So just open up a crappy savings account at your bank and ask them to apply for the CLB.  The money will magically appear in due course.  Then you can simply submit a “registered transfer” form with your brokerage to transfer in the money.  (Make sure to not transfer everything as typically accounts get closed when that happens)

Lastly, if there is money left over at the end that you didn’t get out, it can be transferred to your (the parents’) RRSP without any tax.  But dissolving the plan and taking the withdrawal as cash is taxed at the horrible rate of 20%  Which may seem like a lot for low-income people, but if you’re in the top income tax bracket then this is a deal.  Ideally you do want to completely drain the account when your child is in school otherwise you may be forced to repay some of the CLB money.

Additional info about RESP: http://www.canlearn.ca/eng/saving/resp/faq.shtml

Full disclosure: I do NOT own the aforementioned ETFs, but I DO own many of their component companies directly.  (More risk, better reward, lower fees)  I do this because I like being a little more hands-on.

Stay hungry my friends!

– The Starving Artist Canada

You can find Cameron over at The Starving Artist Canada or on Twitter>> tweet me!

Thanks so much Cameron for doing this great, informative post! I’ve learned a lot myself. We opened an RESP for our daughter when she was five weeks old and her grandparents just sent us money to put into it as part of her Christmas gift! We’ve made it quite clear we would much rather donations to her RESP than toys especially at such a young age. Not that I don’t think a little skin in the game is a bad thing, if she does need additional loans/her personal savings but I’d rather her not have the financial stress I do. 

Enjoy Plunged in Debt?

Pid

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Comments

  1. I didn’t broach much of the topic as to what to buy, and why you have to DIY… That was well beyond the scope of this already lengthy post. The crux of the deal: If you have less than $2,000,000 (yes 2 MILLION DOLLARS) then a financial adviser won’t have your best interests in mind. (It’s their job remember… they get paid if you make money or lose money and the turnover rate is HUGE in the industry since most people can’t actually hack it from commissions alone)
    thestarvingartistcanada recently posted..why I don’t like bondsMy Profile

  2. Hey!
    Great post, lots of great information for parents or parents to be. We are neither BUT I do have a post about RESP’s as well on the blog as it’s so important for Canadians to know what is available to them and their children. If we have kids you can be we will be contributing, it’s a no brainer for us, sorta like the TFSA… Cheers and Happy Holidays! Mr.CBB
    Canadianbudgetbinder recently posted..Budget-Friendly Christmas Decoration Ideas For The HomeMy Profile

  3. In the US we have 529 accounts and the withdrawals are tax free if spent on qualified higher education expenses like tuition, housing, and books. The 20% CESG match is a great incentive to save! Wish we had that!

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Understanding RESP's

I would like to take this opportunity to thank Catherine for the opportunity to write a guest post to her readers with a post on the topic of RESPs. No, Thank YOU for taking the time to do this for me! I hope everyone enjoys this great and very informative post!

For those of you who know me, I’ll apologize right now and say that this article will be somewhat “stolen” from my own posting with some extra juicy bits to help you get over your fear of the I-word.  (Investing).  Additionally I’ve removed *most* of my liberal dose of brow-beatings which you have become accustom to expecting.

Free Money?!

Now for the juicy part:  Do you want $7200 for FREE from the government for your child’s education?  Are you dirt-poor?  If so, you can get another $500 + 100 per year (for up to 14 years) you continue to be dirt-poor for doing absolutely NOTHING!  Now you don’t have to be dirt-poor…  You can be working poor.  Or you can just be poor from an income-tax perspective like me.  (Self-employed with carefully thought out expenses)

So how do you do this?  It involves opening up a couple of RESP accounts for your child.

What is an RESP?

It’s not a scam.  You’re not giving any money to the government.  The government is GIVING YOU MONEY.  RESP stands for ‘Registered Education Savings Plan’.  Which already sounds less scary.  But due to the complete and horrible lack of investment education in Canada for all of you “pre-investors” the name is only partially misleading.  It can be more than just a pedestrian savings account.  (And needs to be because savings do not keep up with inflation!)

Lets get down to basics: the RESP is an account or many accounts with a named beneficiary.  (Your child)  If the word “account” scares you too, then just think of it as a shoe-box, but for money for your child’s education.  So no shoes.  Just cash, GICs, mutual funds (which I hate), ETFs (exchange traded funds – which are better), stocks, bonds, and more.

What Does the Registered Part Mean? 

It just means that there are rules that govern the tax implications of the money in the account.  In the case of the RESP, it means that there is a way to get the money out with NO tax consequences to you (the parent.)  When you need the money to send your child off to school, the monies withdrawn from the account(s) will be taxed in the hands of the child, and since they will be a full-time student and earning ZERO or next to zero then they will be in the lowest tax bracket.  Additionally there are tax credits for tuition so pretty much every cent you need will be tax-free.

As for the “education” portion of the term RESP that’s pretty straight forward.  The money is for your education, be it tuition, dorms, meal-plans etc..  The “savings plan” portion is strangely enough NOT as straight forward.  You can have INVESTMENT accounts as part of your child’s RESP.  You can have multiple accounts too.  Heck, your parents (the child’s grand parents, or aunts, uncles, whomever) can ALSO open accounts for your child!  (You might suspect this is happening if they ask you for your child’s SIN number).  There is only one concern though… there is a LIFETIME maximum contribution limit to the RESP.  So the aggregate of ALL RESP accounts for the one beneficiary can NOT exceed $50,000.  How many of you will this effect?  Probably not too many if you’re reading PF/debt blogs.  NB: (RESPs can be “individual” – one per child, or “family” which is one for all your children.  The family plan risk could mean that one child could potentially deplete the account entirely if they decide to go to,say, Harvard; leaving the remaining children recycling cans to fund their tuition.)  If you only have one child or like keeping things compartmentalized for your brood, than individual is an excellent choice.

Beating Inflation

Now, as for getting on the investing band-wagon, I could prattle on and on and on and on about why…  And I will a little bit right here:  If you put money in a savings account, you will lose money to inflation.  You won’t lose the number of dollars, but those dollars will buy less when you need them in 15-20 years depending on the age of your child/children.  So how do you beat inflation?  I could recommend a few things, but that would set you up for a lifetime of not doing your due diligence, taking “hot-tips” from strangers, losing your shirt and getting bitter about it.  It’s also beyond the scope of this posting since I don’t want you to get bored and stop reading.  (ok ok… here are some great ETFs that hold Canadian bonds, Canadian banks, and mostly Canadian real-estate respectively: XBB, ZEB, XRE)

So how do you get that $7200 I promised? 

The government pays you a 20% matching grant called the Canada Educational Savings Grant (CESG) to a maximum of $500 per year to a maximum of $7200.  So you have to contribute $2500 a year ($208.33/m) for 15 years.  Yes that sounds horrible, but start the INSTANT your child is born.  My son just turned 2 in October, yet his RESP has been open and collected the grants from 2010, 2011, and 2012.  (And soon to collect the 2013 grant).  Why is this important?  Investing is all about time so the sooner you start the better.  If you didn’t start right away, that’s ok.  They do offer retro-active funding for up to 2 years.  So contribute $5k all at once and they contribute an extra $1000 within a month or two.

I Have No Money Though…

Now if you’re dirt poor and can’t come up with this kind of money, it’s always easy to ask grandparents or rich aunts/uncles.  What do I want for Christmas?  I want to fund my son’s RESP.  Grandparents and other family are far more likely to just fork over the cash to fund this rather than leave the money in your sticky fingers!

Additionally for those of you who are dirt-poor, if you receive the “universal child credit” then you qualify for the Canada Learning Bond (CLB) which is a $500 + $100 per year you remain in the low tax brackets.

Caveats:  to properly work your money you will want your own discount brokerage account.  This way you don’t get gouged by horrible brokerage fees, group plan fees, nor do you get forced to buy crappy mutual funds that won’t do you any good.  BUT, since those of you who have enough money to open discount brokerage accounts typically do NOT fall into the “poor as dirt” tax brackets they generally do not have the facility to do the paperwork to collect the CLB.  But any of the big banks do.  So just open up a crappy savings account at your bank and ask them to apply for the CLB.  The money will magically appear in due course.  Then you can simply submit a “registered transfer” form with your brokerage to transfer in the money.  (Make sure to not transfer everything as typically accounts get closed when that happens)

Lastly, if there is money left over at the end that you didn’t get out, it can be transferred to your (the parents’) RRSP without any tax.  But dissolving the plan and taking the withdrawal as cash is taxed at the horrible rate of 20%  Which may seem like a lot for low-income people, but if you’re in the top income tax bracket then this is a deal.  Ideally you do want to completely drain the account when your child is in school otherwise you may be forced to repay some of the CLB money.

Additional info about RESP: http://www.canlearn.ca/eng/saving/resp/faq.shtml

Full disclosure: I do NOT own the aforementioned ETFs, but I DO own many of their component companies directly.  (More risk, better reward, lower fees)  I do this because I like being a little more hands-on.

Stay hungry my friends!

– The Starving Artist Canada

You can find Cameron over at The Starving Artist Canada or on Twitter>> tweet me!

Thanks so much Cameron for doing this great, informative post! I’ve learned a lot myself. We opened an RESP for our daughter when she was five weeks old and her grandparents just sent us money to put into it as part of her Christmas gift! We’ve made it quite clear we would much rather donations to her RESP than toys especially at such a young age. Not that I don’t think a little skin in the game is a bad thing, if she does need additional loans/her personal savings but I’d rather her not have the financial stress I do. 

Enjoy Plunged in Debt?

Pid

Subscribe to get our latest content by email.

Powered by ConvertKit

  1. I didn’t broach much of the topic as to what to buy, and why you have to DIY… That was well beyond the scope of this already lengthy post. The crux of the deal: If you have less than $2,000,000 (yes 2 MILLION DOLLARS) then a financial adviser won’t have your best interests in mind. (It’s their job remember… they get paid if you make money or lose money and the turnover rate is HUGE in the industry since most people can’t actually hack it from commissions alone)
    thestarvingartistcanada recently posted..why I don’t like bondsMy Profile

  2. Hey!
    Great post, lots of great information for parents or parents to be. We are neither BUT I do have a post about RESP’s as well on the blog as it’s so important for Canadians to know what is available to them and their children. If we have kids you can be we will be contributing, it’s a no brainer for us, sorta like the TFSA… Cheers and Happy Holidays! Mr.CBB
    Canadianbudgetbinder recently posted..Budget-Friendly Christmas Decoration Ideas For The HomeMy Profile

    1. Catherine says:

      Thanks!

  3. In the US we have 529 accounts and the withdrawals are tax free if spent on qualified higher education expenses like tuition, housing, and books. The 20% CESG match is a great incentive to save! Wish we had that!

Comments are closed.