Category: RESP

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RESP

RESP Contribution Rules For 15,16 And 17 Year Olds

I recently got a question on my addition resp grant post from Donna – she brings up a number of interesting points which I’d like to address.  If you want to read any other posts on resp then check out the main resp reference page.

RESP Book
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This was her question:

Hello. I have 3 children, 15, turning 17 and an 18 year old.
I am divorced and we had to liquify our RESP 12 years ago.
Since then their father had passed and left a little insurance money.
Is there anything that would be worthwhile in investing into the
RESP now and can it be backdated?? Any suggestions?
Looks like all 3 will be going to post secondary…2 university for
sure.
Help!

Investment time horizon

First point (and most important point) is the concept of investing time horizon.  If you are investing money that you need in a couple of years then you have to invest in something that is not risky in order to ensure the money will be there when you need it.  In Donna’s case I would just put the money in a high interest savings account or short term bonds (via etf or index fund) since her youngest will be going to school in 2 or 3 years.

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RESP contribution rules and catchup rules

The two main benefits of resps are the government grant (20% of contributions) and the tax-sheltered status.  Let’s look at the possibilities for each of her kids:

18 year old

The last year the resp contribution grant can be paid is in the year the beneficiary turns 17.  If you set up an resp for the 18 year old then the main benefit of government grants won’t be available.  The tax sheltering might still be useful but only in certain cases.  If you are in a high tax bracket (ie 40%+) and will be contributing a significant sum of money – let’s say $10k.  Then you will be saving roughly $120 taxes per year (assume 40% rate on 3% interest).  The interest portion of the account will be taxable in the child’s hand when withdrawn but as long as they are in a lower tax bracket then you will save some tax money.  This benefit is pretty debatable – all it takes is one good summer job and the tax benefit mostly disappears.  I’m not sure that I would bother with an resp for the 18 year old especially if the money is going to be used in the next year or two.

Turning 17 year old

By the description “turning 17” I’m assuming the child is turning 17 in 2009.  There are special rules for 16 and 17 year olds with respect to the government grants which mean that this child won’t qualify.

The rules are as follows:

RESPs for beneficiaries aged 16 and 17 will be eligible for RESP grants only if at least one of the following conditions is met:

  1. At least $2,000 must have been contributed to an RESP for the beneficiary before the end of the calendar year the beneficiary turned 15 and not withdrawn.
  2. At least $100 must have been contributed to an RESP for the beneficiary in each of any four years before the end of the calendar year that the beneficiary turned 15 and not withdrawn.

From the comment it appears that all the previous resp contributions were withdrawn which makes this child ineligible for any grants.  My previous comment about tax sheltering for the 18 year old are still valid for this child.

15 year old

Finally some good news – the 15 year old is eligible for the 20% government grant for this year and the next two years – but only if $2000 is contributed this year (see above rule).  Donna asked about “backdating” the contributions – the resp rules allow you to receive up to $500 of grants per year for past years in addition to the yearly maximum of $500 in grants for the current year contribution.
Put simply, Donna can contribute $5,000 for the 15 year old in 2009 and will receive $1,000 in grants.  Then she can do the same in 2010 and 2011 – at that time she will have made $15,000 in contributions and received $3,000 in grants which is well worth the effort of setting up the account.  In this case the tax sheltering effects are even more beneficial than for the older kids.
If she doesn’t want to contribute the maximum then I would suggest contributing a minimum of $2,000 this year otherwise this will be the last year the child will be eligible for grants.

Additional CESG grants

Donna didn’t say anything about income but if your family income is below around $78k then you might be eligible for additional resp grants which could mean grants of 30% or even 40% instead of the basic CESG rate of 20%.  This of course would mean more grant money for the 15 year old.

Summary

If I were in Donna’s shoes I would make sure first and foremost that I didn’t invest in anything with any risk at all (resp or not) – there just isn’t very much time until this educational money is needed.  Secondly, I would definitely open an resp for the 15 year old because there is a lot of potential grant money available.  I don’t know if it’s worthwhile opening resps for the other 2 depending on other factors discussed.  The 15 year old is the only one who will have a clear benefit from an RESP from the information given.  I would also find out if she was eligible for any extra grants.

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RESP

Single Step Financial Improvement Challenge – Set Up RESP Account

We got tagged a while back by (I think?) Prime Time Money, for the Single Step Personal Finance Challenge put together by Finance Freelance Life.  The idea of the challenge is to do something, anything however big or small to improve your finances.  Do you need a will? Are you paying too much for your chequing account?  Do you have a jar of change that needs sorting?  Changing something for the better will get you started (or finished as the case may be) to great finances.

Before I get into the single step that I took – check out Prime Time Money’s financial rap video – it doesn’t get much better than that!

On with the challenge!

As most of you know, my wife and I recently had another child so one of our financial goals was to set up an RESP account for her.  RESP stands for registered education savings plan which is similar to the 529 plan in the US.  RESP accounts can be either individual – for one child or family – for multiple kids.  As I discussed in a previous post, there really isn’t a huge difference in either the individual or family resp. I had considered going with 2 individual accounts because it would be easier to figure out who had what money – but then I also decided that simplification is a worthy goal and went with the family plan since there is only one account involved.  The paperwork was a bit of a pain since I had to set up the new account and transfer our son’s individual account to the family account as well.  However, now that it is set up, I don’t have to do anything and it’s all taken care of.

I’m going to challenge you, the readers to think of something you can do to improve your finances – it will probably be something you have been putting off…feel free to let us know what you are planning in the comments!

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RESP

Back To School – Get Your Educational Finances In Order

This post is part of a project by the Personal Finance Network – see the other posts in this series at the bottom of the page.

If you are heading off to some sort of post-secondary education this fall such as college or university and you have funds available to draw upon then it is important to get your educational finances organized.

How much money will you need?

At this point you should have a pretty good idea of the main costs you will have to pay. Expenses like tuition, rent, food, books, booze can either be researched or estimated.

Scholarships, Grants, Student loans

Do some research to find out if there is any free money available for your studies.

How much money do you have?

Add up all your funding sources: bank accounts, scholarships, gifts from relatives, educational accounts and figure out how much money you have. Do you have enough? I hope so because it’s probably too late to do anything about it now if you don’t! 🙂

Specified Educational Plans such as RESP, 529, ESA and TSP accounts

If you have money in an RESP, 529 plan, ESA or TSP account which are investment accounts designated for educational uses then you need to do the following:

  • Check your documentation and verify how much money is in the accounts.
  • Make sure you know how to get money out of the accounts when needed. Do you need receipts?
  • Find out if there are any restrictions on the withdrawals from these accounts.
  • If someone else owns the account then work out how you can get the money from them when needed.
  • If you are making withdrawals then these accounts should already be in short term fixed income investments such as high interest savings account or short term CDs or GICs. If not then switch them over today! You can’t afford to weather a big market drop right now.

Regular investment or savings account.

  • Verify amounts of money in these accounts.
  • Make sure you can access these funds.
  • Should not own any equities in this account at this point in time.

Check out the other posts in this series:

Blunt Money wrote “An empty wallet isn’t required for back to school“.

Moneyning did “Frugally and Happily Back To School 9 Different Ways“.

Cleverdude wrote about “Work, Life and School for Graduate Students“.

Squawkfox tells us about “Dorm Room Essentials Checklist“.

Canadian Capitalist has some ideas on “Saving on Textbooks“.

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RESP

RESP – My Suggestion For A Better RESP Program

This is the last post of the Big RESP Series. See the previous post on Keeping It All In Perspective.

One of the problems with RESPs is the number of rules surrounding them. This creates a product that is very expensive to administer for the RESP providers and government and very hard to understand for the average parent. Since the rules in their current form (more or less) have been around since 1998 and the government and financial companies have already created their systems and processes for these accounts there is not much point in changing them now. However, I’d like to put forth my ideas on how the RESP program should have been done.

One of the complicating factors of RESPs is the lifetime and annual limit on contribution grants. Because of this, the financial companies and government have to keep track of all the contribution amounts and for family plans, the allocation between beneficiaries.

A better way to do RESPs might have been to just offer tax free accounts ie you make contributions [edit] with no tax rebate [edit] , the investments grow tax free and then upon withdrawal the money is taxed in the hands of the student or if the student doesn’t go to school then it’s taxed in the hands of the subscriber as normal income (no AIP) tax.

What about the grant money you ask? Good point – take the money that would have been paid out in contribution grants and just hand it out to children of a certain age which is similar to Alberta’s ACE program. For example the government might give $100/yr to every child under 10. These grants would have to be put into RESP accounts and would be subject to the normal withdrawal rules outlined above.

Another option with the grant money would be to just give it to students who are actually in or about to start school. That way there are no grants to track and no investments accounts.

One of the benefits of this new RESP would be that it would cost the government the same amount of grant money, both the government and investment companies would benefit from lower administrative costs and lower income people can participate more easily. Currently it’s more middle and higher class people who get the biggest benefit from the RESP program but they are not the ones who need it as much.

That’s it for the RESP series so hopefully you enjoyed reading and learning from it (I know I did) and can use it for reference in the future.

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RESP

RESP – Keeping It All In Perspective

This post is part of the Big RESP Series. See the entire series here.

See the previous post on How To Get Started.

Since the government started giving grants for RESP contributions in 1998, the RESP program has become quite well known and has become a new source of stress for new parents. I know a lot of friends who have set up RESPs for their kids which is great since most of my friends are older parents and have reasonably good finances. For someone who is younger and/or doesn’t have great finances, RESPs should probably be a lower priority to things like lowering debt and saving for retirement. It’s important to make sure your own finances are in good shape before saving for a future expense when you don’t know how much that future expense will be or if it will even occur. There is no point in making RESP contributions and then later on you have to withdraw the money to pay for the mortgage.

Try not to listen to the hype from investment companies – the same people who write the ads that try to scare you into investing with their company (you need 70+% of your income to retire or you will be living in a cardboard box) also create the ads for RESPs. Investment companies often come up with fairly “worst case” scenarios for their projections of how much post secondary education will cost in 18 years or so. They try to make it sound like your child’s education will cost a certain large amount and if you don’t have that much saved up when they finish high school then they won’t be able to go on to post secondary school.

The reality is that most parents (hopefully not me) are still working when their kids go to school so they always have the option of diverting some of their income to make up any shortfall. The investment company ads also don’t seem to include the fact that most students work during summers and can offset a portion of their schooling that way. The last point I want to mention here is that like most things in life, post-secondary education involves choices that cost more or less money. If a student can live at home and go to school, that is much cheaper than going to school in a different city. The student may not like that choice but sometimes money (or lack of) can help simplify the decision making. Other factors that I can think of are housing – do they live in a dorm, shared accommodation or their own apartment? Do they have a car? All these choices will play a significant role in the amount of money required for the students education.

Summary

RESPs are a good thing but they are not as important as your family finances. You are not doing the child any favours by maxing out the RESP grants but they can’t participate in some activites because you don’t have enough money.

Establish your family finances first, then worry about the RESPs. You can carry forward the contribution room so there is no rush to start the account as soon as the child is born.

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RESP

How To Open Up An RESP Account For Your Child

One of the big questions that most investors have once they decide to open an RESP account is how and where to do it.

Here are some options – please note you need a SIN for the child to open an RESP:

RESP Book
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Do-it-yourself

The best option if you want to do the investments yourself is to open up an account with TD and invest in their e-Series index funds. These index funds have the lowest MERs (costs) of any funds in Canada so they are a pretty good deal. This account has no annual fees either. The idea with these funds is to do a basic couch potato portfolio. Please note that the TD e-Series accounts do not support the additional CESG grants or CLB for lower income families.  To get those extra grants, a regular TD mutual fund account can be utilized.

This post describes the exact procedure to get this set up. Basically you open up a TD mutual funds resp account and then apply to convert it to a TD e-Series account and then makes your purchases. Here is another post on getting started and please check out my asset allocation post on this subject. This post contains a sample RESP portfolio using the e-Series funds and includes the exact fund names as well. Thanks to the Canadian Capitalist for doing all the leg work on the TD accounts.

Another option for DIYers is to open up a discount brokerage account. You can see a comparison table of the various Canadian discount brokerages. One advantage of these accounts is that you can buy Exchange Traded Funds which are even cheaper than the TD index funds, however you will only be able to purchase them infrequently, otherwise the transaction costs will make them too expensive.

Financial Advisor

If you don’t feel comfortable setting up an account and investing on your own, and don’t mind paying more money in fees then you can usually get an RESP account setup at your bank or with a financial advisor. Try to watch the fees since most resp accounts are charged an annual administration fees.

Pooled Plans

Pooled or group plans are run by resp providers and should be avoided. They have very high fees and a strict contribution schedule with onerous penalties if you don’t keep to the schedule or the child doesn’t go to school. If you are already enrolled in one of these plans then you should continue with the plan, it’s not worth the penalties to switch out. These plans are not that bad but there are much better choices available.

More detailed RESP information

Check out the RESP rules page for a list of more detailed RESP articles on this site.

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RESP

RESP – A Comparison to Non-Registered Accounts

This post is part of the Big RESP Series. See the entire series here.

See the previous post on Individual and Family Plans

I did an analysis of some different resp and non-registered account scenarios (child goes to school or not) in order to determine the different amounts of money that would result from each scenario. The idea was to try to see how well the resp does in the different situations compared to putting the money in a non-registered account. Thanks to the Money Gardener for the idea.

The spreadsheet showing all the calculations is here. Basically it’s an account with $150/month contributions into an equity security. In real life an investor might switch to a more conservative portfolio later on but I decided to keep it simple for this example.

Some assumptions

The equity return is 0.5% per month which works out to just over 6% per year, it also gets a 2% dividend at the end of each year. The dollar figures were calculated at the 18 year mark which is when the student would normally be going to school.

The average tax rate on the withdrawal of the subscriber who is working is 40%, subscriber who is retired is 15%

Scenarios:

  1. RESP account – student uses the money for school. This scenario is the typical “hoped for” scenario where the student uses the money to go to school. I assume that the student doesn’t pay any income tax on this money. All dollar figures are future dollars.
  2. RESP account – subscriber collapses plan before retirement. If the child doesn’t go to school then the subscriber will pay the marginal tax rate on the income in the account.
  3. RESP account – subscriber collapses plan during retirement. In this case the student doesn’t go to school but since the subscriber is retired they have a lot more flexibility with respect to income tax rates. Keep in mind that the plan doesn’t have to collapsed until the 26th year of it’s existence so there is time to do this option even if you are working when the child decides not to go to school.
  4. Non-registered account – money is withdrawn before retirement. For non-reg accounts since the money is always taxed to the owner of the account it doesn’t matter whether the child goes to school or not – the taxation is the same.
  5. Non-registered account – money is withdrawn during retirement. In this case the capital gains paid by the account owner will probably be less than when they were working.

Results

Scenario #

Scenario

Amount of $$
1 RESP account – student uses the money for school.

$87,556
2 RESP account – subscriber collapses plan before retirement.

$51,870
3 RESP account – subscriber collapses plan during retirement.

$64,039
4 Non-registered account – money is withdrawn before retirement.

$62,284
5 Non-registered account – money is withdrawn during retirement.

$66,953

Analysis

If the child goes to school then the RESP account is the clear winner with a total of $87,556. The non-reg account would only provide $66,953 or $62,284 depending on if the account owner is retired or not. This is not surprising considering the 20% grant available to the resp as well as the zero tax drag during the accumulation phase.

If the child does not go to school then the results are dependent on if the subscriber is working or retired when the plan is collapsed. If the subscriber is retired then there is not much difference between the resp ($64,039) and non-reg account ($66,953). If the subscriber is working, then the non-reg ($62,284) fares quite a bit better than the resp ($51,870).

Conclusion

If your child goes to school then the RESP account will have about 30% more money than the non-reg account. If the child does not go to school then the non-reg account will have 5% more money than the resp if the subscriber is retired, if subscriber is working then non-reg account will have about 19% more.

Bottom line is that if you are an older parent (like me) and are pretty sure that you’ll be retired (or can control your income) by the time the resp plan is 26 years old then the resp is the winner hands down. If you are a younger parent then the choice is not so clear, although there is a big upside (30%) to the resp, there is also a significant downside (19%) if the child doesn’t go to school.

Things to think about

Commander T pointed out that if you transfer the non-contribution portion of a collapsed RESP to your rrsp (if you have the contribution room) then you can avoid the 20% penalty. I personally don’t plan to have this much room, but this is a great strategy if you can do it.

One strategy to think about if you are a younger parent is to wait a few years before starting the resp account since that’s when the clock starts ticking on the age of the account. If the child doesn’t go to school then collapsing the resp plan when you have no other income will reduce the income tax considerably. Most younger parents have mortgages, rrsp room so waiting a few years to start the resp is probably a good idea anyways.

How many kids? Having two or more kids will improve the odds that the resp money will get used since you can transfer between beneficiaries. This generally only works if the older child doesn’t go to school or they are very close in age.

Trusts

Establishing a trust for your child is another method of funding their education and saving taxes. The reason I didn’t get into trusts here is because I consider them a completely different animal compared to non-reg accounts and RESPs. Unlike RESPs and non-reg accounts where the parent owns and invests the money and controls the account all the way through the process, with a trust you give the child the money and will never get it back. My problem with this is that if the kid doesn’t go to school then I don’t want him to get any of the education money since he probably doesn’t need it. This is not to say I wouldn’t help him out if he needed it. The other problem I have with trusts is that it might encourage the child not to go to school. Think about it, if you are 18 and have a trust account with $50k in it and you have a choice between going to school or buying a fancy sports car or travelling the world for a few years – which would you choose?

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RESP

RESP – Individual and Family Plans For 2020

There are two types of resp accounts that you can have: individual and family. This post will outline some of the rules and differences of these account types.

RESP Book
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Individual Plan RESP

Individual plans can only have one named beneficiary. The beneficiary can be any individual named by the subscriber including the subscriber (Individuals can open RESPs for themselves). There are no age restrictions on this type of account, however CESG and other grants can only be paid to beneficiaries under the age of 18. The beneficiary on the account can be replaced by anyone else but if the new beneficiary is not blood related to the subscriber then any CESG (grants) have to be repaid. The last contribution date is the end of the 21st year of plan’s existence. Plan has to be collapsed during it’s 36th year.

Family Plan RESP

Family plans can have one or more beneficiaries. The beneficiaries must be connected to the subscriber by blood or adoption. This includes children, grandchildren or siblings of the Subscriber, either by blood, adoption, or marriage. The beneficiaries must be under 21 years old when named.  Beneficiaries can be removed or added anytime during the life of the plan.

If there is more than one beneficiary then the contributions have to be allocated to each beneficiary. For example if you have twins you might set the allocation at 50% for each child. If you have two kids that are different ages and you don’t set up the resp until the second child is born then you might choose to allocate more of the contribution to the older child in order to catch up on their contributions.

One rule which is always in effect for both types of plans is the maximum lifetime grant amount of $7200 per child. If you have a situation where both of your children have received the maximum grant and you want to transfer some of the contributions to a different beneficiary then you will lose the corresponding grants. This also applies to transfers with individual accounts as well.

So which is better? Family or Individual?

If you only have one child then the individual account is the obvious answer. For multiple child families it may appear at first glance that family accounts are more flexible than individual accounts however in fact they are pretty much the same thing, because the rules allow transferring money between any type of accounts. In case one of your kids doesn’t go to school, it doesn’t matter whether you have your kids in a family account or individual accounts since you are allowed to transfer money to the kid(s) who are still going to go to school in either case. I would suggest that family plans are slightly better if you have more than one child mainly because it will save on account fees and it might simplify the paper work a bit. Bottom line is that it doesn’t really matter so pick the cheapest and most convenient option.

Tip – If you have one child, you can set up a family account for future expansion

Multiple RESP accounts for same beneficiary – Communicate!

When setting up a RESP for a child, it’s important to communicate with other relatives and friends who might have also set up a resp for the same beneficiary. The government will add up all the contributions attributed to each beneficiary in order to enforce the various grant limits and maximum amounts. This applies to any RESP accounts set up for a beneficiary – it doesn’t matter if they are set up in different financial institutions by different subscribers.

You might be wondering why someone would set up an RESP for a relative (ie nephew) rather than give the money to the parents to set up an RESP? For one thing, if that parent is not as financially sound as you are and perhaps you don’t trust them, you might not want to give them the money directly for fear that they won’t set up the RESP account or maybe they will withdraw the money before the child goes to school. Another scenario is if the child doesn’t go to school, the money goes back to the subscriber, so you might want to make sure you get your money back in that case.

More detailed RESP information

Check out the RESP rules page for a list of more detailed RESP articles on this site.