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.