Hello fellow personal finance readers. I go by the pen name “Teacher Man” due to the fact that I recently graduated from university and am in my second year of teaching high school. About 9 months ago my partner and I started a website called My University Money. It is aimed at helping young people (with a specific focus on post-secondary students) and just talking about financial and student lifestyle issues in general. Young & Thrifty was one of the first bloggers to really reach out to us and give us a little recognition when we were just starting off. When I read that Y & T was hitting a busy patch in life I offered to do a little staff writing for her, and she graciously accepted. Hopefully you readers don’t notice THAT much of a drop-off from the typical high quality posts you’ve come to enjoy here!
Since it’s Family Day in Alberta, Ontario, and Sasketchewan, I thought it would be appropriate to include a post on RESP’s! (DEAR BC do you hear that? Everyone else is having Family Day except for us).
The RESP – An Intergenerational Gift
Over on my site we constantly talk about Registered Education Savings Plans (RESPs) and how they are basically our favourite economic tool ever. I LOVE the idea of a government program that is truly a “hand up” instead of a “hand out,” and that’s exactly what a RESP brings to the table. For those of you that aren’t familiar with RESPs, the basic idea is that the government wants to help parents to save for college. So what they do is open up an account that is more like the TFSA than the RRSP actually. Parents can put money away for their children’s post-secondary education (which includes a huge array of programming options), and use this account to invest the money and not pay any taxes on the investment income. The original contribution is not tax-deductible like an RRSP, and the investment income is taxed as income for the student when it is taken out, which basically means no tax is paid, because the vast majority of students don’t earn enough to exceed the basic tax exemption. The best part of the plan, is that in addition to this tax shelter, the government will literally match 20% of your contribution, up to $500 per year ($7200 lifetime). An automatic 20% return on your investment (called the Canada Education Savings Grant)! Your money, plus the government money, gets to grow tax-free in that nice little account waiting for your little one to graduate. If they choose not to continue into post-secondary, there are several options available to switch the money to a sibling, or to move the money over to an RRSP and simple lose the government contribution. Saskatchewan loves the program so much they are now offering their own little top-up to the plan from their own government coffers! I love this plan because it rewards those that take responsibility for their child’s education, and offers strong incentive to invest in our futures.
Just Open An Account Already – It’s So Easy!
You can find much more detailed information about RESPs in plenty of places, but suffice to say it is a great deal. With tuition fees climbing higher and higher (at a much faster rate than inflation), and student debt loans spiraling out of control, it is important that people take advantage of this program in order to ensure that their children don’t start out in a hole. As much as I would like to see the post-secondary bubble popped, we should all prepare for the fact that post-secondary education is becoming more and more essential in the information-based economy, at the same time it is becoming more and more expensive.
Parents Do Know Something After All…
Now to me, it is fairly common sense that parents should be contributing to these little plans (even if the numbers say this isn’t as common sense as one might think). I’ll skip over the sermon here in favour of a slightly different angle that was inspired by my parents. Now my parents are pretty fiscally conservative by nature, so they never had much exposure to anything except bonds and mutual funds (yuck!), but they did put together a nice RESP account for my brother and I. The further my brother and I went in education, the more my parents realized what a great decision they had made, and the happier we all were that they had done it! My mom has been so encouraged by how much help the RESPs were to my brother and I that she offhandedly made asked the other day that if (in her mind likely it’s “when”) my brother or I had children, if grandparental contributions to an RESP would be a good idea. This triggered a bit of an epiphany for me.
They’ll Hug You For It One Day
While I realize that the demographics of readers here at Y & T probably don’t have a lot of grandparents among them, I think this is the perfect way for young parents to ask for help. We have this weird intergenerational gap in Canada and the USA right now. Generation X and Y are finding themselves stretched in so many ways with higher education costs for their degrees, higher mortgages than the prior generation, elderly parents who are living longer than ever before, and a depressed job economy. It’s no wonder they having a hard time balancing everything and finding money to contribute to RESPs. Grandparents on the other hand are retiring with more wealth relative to any generation before. If many of you out there are anything like myself, you treasure your independence, and hesitate to ask your parents for a lot of help; however, if you discuss something for their grandchild, I’m sure most grandparents would love to contribute at least a little. It’s by far the most profitable way to shift wealth between generations, and it just feels like such a cool strategy when you think about grandparents helping the new generation. My first thought was about how when you go to some many children’s birthdays, they are overwhelmed with presents (and usually end up playing with the box). Now, a $100 contribution to an RESP, instantly becomes $120 when the government kicks in its part, and when you have non-taxable income growth and a solid investment plan, this money could easily grow to $300 or so when that child is able to go to school. That’s a pretty sweet birthday present! Especially if it’s done for 10 or so years. As an added incentive, the money can also be invested more aggressively with a 10-15 year time frame within an RESP, than it can be in the hands of retiree that is just looking for income generation anyway.
Aw Thanks Gramps, A Werther’s Original and a Debt-Free Education
I know there are many retirees out there on fixed budgets, and that this won’t work for everyone. I just thought it was an excellent offer of help from my mom, and it was an offer that my stupid pride wouldn’t be hurt by accepting. I can’t think of a better gift to give someone that the gift of a great post-secondary education. There are just so many benefits to being in that higher education environment. Rather than ask the government to give us more money, or provide free post-secondary schooling, I think we should lobby instead for even higher incentives within the RESP plan, and invest big time in public education campaigns to ensure everyone knows about their benefits. This encourages us to take responsibility for our own children’s futures instead of asking for someone else to do it for us! If you and grandparents each make a point of contributing a little into RESPs for the first five years of a child’s life, the magic of compound interest will take over from there, and could provide opportunities your loved ones might not otherwise have had.
Readers, what do you think of the RESP? MoneySmartsBlog has a great book about RESPs as well if you want more information.
The most valuable gift that a parent can give a child is good guidance. If you’re in Ontario, right now, the best guidance is to encourage your child to get a trade and move out west. Giving your kid a 20% instant tax-deferred return on your capital (after which it’ll probably languish in high-MER bank capital-burner mutual funds) pales in comparison to setting them on the right course. If you don’t, they may end up spending all of that wisely-invested RESP capital in a bugger-all (BA) in sociology and becoming an (unemployed) teacher.
Interesting response Joe, I agree with you on some levels, although I must admit that being an (employed) teacher is a pretty good gig. The great thing is that paying for that trade can also come from the RESP that you’re bashing, and it definitely does not have to be invested in high MER investments! The plans are very flexible in how they can be used up. While trades are a great deal, there are worse things out there than a BA.
Being a teacher, unless you’re willing to move far up north or abroad, is a lottery. This is for the exact reason that you admit – it’s “a pretty good gig”.
Ontario puts out thousands more teachers from BEd programs than will ever be employed in teaching. Why? The market signals are perverse. If the pay was lower or the working conditions were less desireable, there’d be a better match between supply and demand. (Notably, by the way, teaching is not a trade. It’s a heavily unionized job in the broader public sector). Is it as bad in other provinces? No, because they succesfully sucked the life blood out of Ontario when the getting was good, and now suck oil out of their ground without giving a dime back to Ontario. But the demographic question mark of smaller and smaller youth cohorts is the damocles hair, holding the guillotine above the entire profession’s head.
A lottery economy is not an efficient use of young minds and it’s not a compelling reason for young Canadians to go into massive debt (nor for their parents to shovel thousands a year away from their own retirement needs). Perhaps *only* parents who max out their retirement savings are the ones who use RESPs. Or perhaps it’s a shell game — a mere distraction by the government — to divert money away from tax deductible RRSPs towards non-deductible “R”ESPs. Imagine all of the tax dollars they’d get from people TODAY instead of in thirty years. Surely the government would never try to distract people from RRSPs using RESPs and TFSAs…
I like teachers as a group; I think they add a lot of value. But a teacher worth his financial salt should really analyze and critically question the actuarial assumptions made by his ‘bullet-proof’ pension plan. Perhaps questions such as “Why would the OTPP need to de-index?”, “Why would the OTPP make such a risky LBO run at BCE, that would have required them to take on over 30 billion in liabilities?” The answer is risk/return, and more specifically that they require much more of the latter than they’ve been getting so they need to recklessly accept the former. Perhaps you’re not in Ontario and perhaps your pension plan is vastly better off. I am enrolled in a different Defined Benefit plan, and I’m always asking similarly critical questions. That, of course, is the same kind of dangerous thinking that could lead one to question Canada’s ‘bullet-proof’ housing market.
Also I’d honestly like to know where these no-fee account, no-load, low-MER RESP options are.
@MUM- Agree, Teacher Man. I have always been envious of a teacher’s job- seriously July and August off? December off? C’mon. Who doesnt’ want that!
Let’s not get into degree or work/career bashing, shall we? 
Really? You actually read that thoughtful analysis and your conclusion is that I was career bashing? My dad was a teacher, brother is a teacher… the long term job prospects for teaching are terrible.
Getting a BA to become a teacher is now gambling with your future. What’s rude? Being truthful, or lying like a guidance counsellor (you can do anything!) and ruining peoples’ lives?
Get a trade, go west, and absorb knowledge re: personal finance. You’ll be on your way to millions.
@Joe- My bad! I was just trying to mediate
but apparently I didn’t need to lol.
One more year until us BC folks can celebrate Family Day too! I didn’t really know anything about the RESP before this post, but it sounds like a great deal. It makes sense for a government to reward saving for education. They are bound to make it back through tuition taxes and future taxes on the student’s income. I know I was very appreciative that my mom was able to help pay for my post secondary education. With the high cost of education, many young people would not pursue it without some kind of financial assistance.
In Manitoba we call it Louis Riel day (well actually, several of us refuse to call it this due to the fact that old Riel was kind of a murderous traitor, but hey, it’s a day off). Glad you liked the article.
@Modest Money- Just saw that in the paper today! Yay Christie Clark (and her wanting to be re-elected lol). I’m excited- no more long stretch of depressing trudgery until April!
It is amusing that she made an excuse to have it start just when she will be in the middle of her re-election campaign. She’s one sneaky politician…basically Gordon Campbell in a skirt.
@MM- Did you notice in today’s paper that she is wearing glasses now? I think she’s trying to look smarter so that the public has a better impression of her. Desperate times calls for desperate measures!
Very well done and informative article.
Only one little flaw: RESP stands for Registered Education Savings Plan. At least that’s how they are listed on the CRA website.
http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-e.html
duh… wow, that is a dumb error on my part. I did know that. Hopefully Y and T notices and changes it!
@MUM- okay I will! I should have read it over hehe.. it was in bold too! Thanks for noticing!
I first heard of this in gail vaz oxlade’s Debt Free Forever book, and I think it’s awesome. I’ve paid for my education out of pocket and it has been horrible. I definitely plan to help my future kids out.
Make sure they thank you for it Diane!
@Daisy- Good for you! Your future kids will thank you, I’m sure
I should read Debt Free Forever- I love Gail.
An awesome way to give kids a boost when it comes to paying for university. I think so many people don’t open an RESP for their child – because it’s so hard to understand the rules & regulations.
@Julie- Also because there’s just so much to think about as a new parent too!
Getting the grand parents to help make contributions is a great idea. The quality of their later retirement years rests on the shoulders of today’s youth after all.
I want to open an RESP account, but I don’t have any kids yet T_T
Haha, I bet you could find a set of parents willing to help you by proxy on that one!
@Liquid- Well then get on it! lol
Nice article. I’m from the US, but it is always helpful for me to review this so that I understand the differences between your financial vehicles (i.e., for retirement and/or education) and ours.
@Roshawn- What do you guys down south have for education? Do you have something similar to RESPs?
We opened up an RESP for our daughter right after she was born and took advantage of the initial grant money. We don’t maximize our RESP contributions ($2500/yr) because we have other financial priorities to consider, but we will catch-up eventually. I believe in getting your own finances in order before going crazy with the RESP contributions.
The nice benefit of working at a University is that my kids can get free tuition (if I’m still working here by then).
That’s a huge benefit Echo! Honestly, if you start young and let compounding do its thing, you don’t have to max out the contribution, but I’m sure you already did the math!
@Echo- Ahh the perks of your job! Maybe you can go back to working there when your children at nearing the end of high school if you get bored of it right now
I think it’s great. I have no kids, but give money to my brother to put in his daughter’s RESP. If you’re “middle class”, there’s very little the government will give you, so you might as well take it where you can!
@Ellen- That’s a great gift to your brother!
Starting that contribution early really is important. It forget the savings process, and then be stuck with that thousand dollar university bill later
Great article – thanks for mentioning my book.
I hadn’t heard of Sask offering any extra grants – were you referring to Alta?
Great post
Only problem I have with RESPs are the cumbersome reporting obligations and double taxation that follows if the beneficiaries or contributors (?) are US citizens (coupled with the general inability of Non-resident citizens to establish a 529)
Outside that narrow situation, RESPs are amazing vehicles.
Wow! This could be one particular of the most useful blogs We’ve ever arrive across on this subject. Actually Wonderful. I am also an expert in this topic therefore I can understand your effort.
To bring it back to the original comments between Joe and My University Money…. you can very well use RESP funds to pay for a trades education. Nothing says you must go to university.
Most plans will allow you to attend any accredited post-secondary institution which includes trade schools, art schools, colleges etc. Many plans will let you attend school anywhere in the world.
When registering your RESP be sure to ask the dealer which types of schools and which countries your child can attend.
Exactly Laurent! It is a versatile savings vehicle that can be used in a variety of ways! Post-secondary education of some kind is getting more and more important these days, to ignore this is crazy.