The Low Down on the RESP

 

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.

About

Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

41 Responses to The Low Down on the RESP

  1. 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.

  2. 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!

  3. 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.

  4. 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

  5. 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).

    • @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 ;)

  6. 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!

  7. Starting that contribution early really is important. It forget the savings process, and then be stuck with that thousand dollar university bill later :P

  8. 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.

  9. 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.

  10. 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.

  11. My son is in his fourth year of University and recently received his student loan statement for the coming year. Since our family income is slightly above the level that the federal government considers middle income (to qualify for federal education grants) we were surprised when we figured out that our son would be graduating with less debt if he hadn’t received EAPS from an RESP.

    I’ve read that an Ontarian student can possible withdraw their CESG in one year and still receive Ontario Student Opportunity Grants in other years but that isn’t the way it works in NS. Here when a student completes a four year degree their student loan is capped at $28560, which happens to equal four times the maximum annual federal student loan amount ($7140). Therefore as long as there is the maximum federal loan every year, at graduation all provincial loan and grants becomes a forgivable grant.

    As our son cannot live at home (we live beyond commuting distance) he would have qualified every year for the maximum federal loan. If our son had not had an RESP his forgivable provincial loans and grants would have totalled approx. $13000. However, because of his EAPs, his provincial grants only totals $1394. Therefore his government grants (CESG + provincial grants) was $5100 + $1394 = $6494. So if he hadn’t had the RESP EAPs he would have approximately $6500 less student loan to repay after graduation.

    The NS loan cap was announced after we finished contributing to his RESP so we don’t fault ourselves for making that decision but now I would be very hesitant to recommend RESPs to any NS family unless they qualified for the Canada Learning Bond. Families whose income is too high to qualify for the maximum federal student loan should also consider contributing to an RESP to gain the CESG. (My very back of the envelop calculations plus the CanLean parental contribution calculator predicts that could happen after the parental income exceeds $126,000.). I don’t have a crystal ball to predict how long the NS student loan cap will exist in its current form but for now other NS families, whose students won’t be living at home, might be better advised to save money outside of an RESP and then gift it to their student when they are ready to pay off that $28560 loan.

    • This is a very interesting situation Bob. I found a similar discussion in the comments section of Mike Holman’s (aka The Godfather of RESPs) blog here.

      I’m no expert on the loan forgiveness that happens in NS, but I do know this much: The CESG portion of an RESP + any investment gains that accrue within the account will be seen as income in the student’s hands across Canada. That would be why OSAP can handle things a certain way. I know that I personally took most of my EAP a certain year where I had less income than others in order to keep myself in the lowest tax bracket.

      I see no fault in your calculations in terms of the provincial portion of a loan being forgivable, and your rationale makes sense to me. That is the problem with a lot of these student loan and automatic grant programs – they actually give disincentives to do the “responsible” (from society’s standpoint anyway) thing.

      There are some problems with the student loan calculation however. Can you tell me what you punched into the parental contribution calculator? I know that in my province (MB), if your folks made over 70K in combined income, and you had a summer job it was impossible to get any federal or provincial student loans (and usually grants).

      From what I can tell NS is also the only province that has a loan cap like that? I have a blogging friend that wrote about it here.

      Anyway, thanks for sharing, it’s something I’ll ask around on for sure.

  12. Kyle were you able to live at home? That would substantial reduce the amount of loans that you could qualify for.

    Because my son could not live at home NSLS assessed his need at between $15689 and $17140 per academic year. We had an annual parental income that ranged from $79612 to 82919.33 and NSLS calculated an expected parental contribution that ranged between $612 to $748. (The highest amount was the year we had the highest income and only one post secondary education.) The student’s annual summer employment ranged from $0 to $10,000 and averaged $6300. Average annual scholarships were $5800. However, NSLS only uses a % of those amounts as student contributions so in years where he did not have EAPs (and we contributed the amount calculated by NSLS) he qualified for $7140 in Federal loans plus provincial loans/ grants of between $2500 and $4800.

    And I agree with you about disincentives to do the responsible thing. At one time the federal education grants penalized students who earned higher scholarships and made and saved more at student jobs. I was happy when they switched to an income based system. (Plus grants for students with disabilities and dependants.) But in NS student grants are still reduced by the scholarship and income earned by the student, and RESP EAPs contributed by the parents and grandparents, so there is still a disincentive to do the responsible thing.

    • I was a rural kid Bob so couldn’t live at home either. To be honest, I never applied for student loans because I didn’t need them and I was fairly certain (correctly) that we didn’t them. The provincial differences must be stark because I know students that made in the 6K-8K range during the summer in Manitoba, and their parents made about 80K (with 1-2 children in school) and they didn’t qualify for student loans. I do know that the cap in NS is unique and not really well-known.

      The incentive thing really made me angry as a student. I’m of the opinion that there should be less money in needs-based awards/grants and more transferred to merit-based awards. If you need the money badly you’ll work that much harder right? There has to be a formula that doesn’t punish conscientious students.

  13. Kyle I always encourage students to apply for student loans because:

    1/ The Explanation of Assessment makes it very clear how little our governments expect parents to contribute to their students’ education. Hopefully this will foster less feelings of entitlement and more gratitude when parents contribute more.

    2/ Families often underestimate how much grant money is available to them. For example, according to http://www.canlearn.ca/eng/loans_grants/grants/middle.shtml a Manitoba family of four people earning less than $ 73,215 is entitled to Canada Student Grants of at least $800 per academic year for each student. But the students will only receive the grants if they apply for a student loan every year.

Leave a reply

Headline Name: Email: subscribed: 0 We respect your privacy Email Marketingby GetResponse