Categories
RESP

RESP Contribution And Grant Rules For 2020

One of the main benefits of RESP accounts is the federal Canadian Educational Savings Grant (CESG). This grant is 20% of any eligible contributions in an RESP account.

How the RESP grant system works

Let’s say you open an RESP account for your bouncing new baby and contribute $1,000 into the account. Your financial institution will send the account and contribution information to the Canadian government for grant approval. If the grant is approved, the institution receives the grant money and deposits it into your account.

RESP Book
Buy The RESP Book on Amazon

The math

20% of the $1,000 contribution is $200, so you will now have an extra $200 in the account courtesy of the Canadian government. This basically gives you an extra 20% one-time return on your contribution.

Basic RESP contribution rules and numbers to know

  • $2,500 – Amount of annual grant-eligible contribution room accrued each year starting in 2007 or the year the child was born (whichever is later). The contribution room continues accruing up to and including the year when the child turns 17 years old. This amount is based on the calendar year and not the birth date.
  • $2,000 – Amount of annual grant-eligible contribution room accrued each year starting from the year the child was born or 1998 (whichever is later) up to and including 2006.
  • 20% – Amount of grant earned on an eligible contribution. For example: a $1,000 contribution would earn a grant of $200, if that contribution is eligible for a grant. There are additional grants available for lower income families.
  • $500 – Maximum amount of grant a beneficiary is eligible to receive for each calendar year from the year they were born or 1998 (whichever is later) to the year they turn 17 years old. This amount was only $400 for years prior to 2007.  A calendar year is from January 1st to December 31st.
  • $7,200 – Lifetime grant limit per beneficiary. If you contribute $2,500 every year, you will hit the maximum grant level in the fifteenth year, and no more grants will be paid to the beneficiary. This limit includes additional grants available to lower income families.
  • $50,000 – Lifetime contribution limit per beneficiary. Because there is no annual limit, you could potentially make one single contribution of $50,000 to an RESP if you choose.
  • Contribution room carry over. One of the great things about the RESP is that you can carry over unused contribution room into future years. However, there is a catch: Only one previous year’s worth of contributions can be used each year.
  • Contributions are not tax-deductible.  You won’t get a tax slip, and you can’t deduct RESP contributions from your taxable income.


For example: If you start an account for your six-year-old child, you can contribute $2,500 (this year’s contribution room) plus another $2,500 (from previously unused contribution room) for a total of $5,000, to receive a grant of $1,000. You are allowed to contribute more than $5,000 in this scenario, but there will be no grant paid on the amount above $5,000. When calculating contribution room carryover from past years, don’t forget that the contribution limit was only $2,000 prior to 2007.

RESP contribution examples

Let’s do some examples to clarify exactly how this works.

Example 1 – Simplest example

Steve was born in 2010. His parents are broke, but one kindly grandmother decides to open an RESP account for him.

She opened the account in 2010 and has $2,500 of contribution room available. She contributes $1,500 to the account in 2010, so the RESP grant is $300 (20% of $1,500).

In 2011, she contributes $1,200, thereby qualifying for a $240 grant.

Example 2 – A more complicated example

Little Johnny was born in 2006. His parents decide in 2010 to set up an RESP account for him. They want to know how much money they can contribute each year to catch up on all the missed government grants.

Let’s add up the current contribution room.

2006 – $2,000 of contribution room

2007 – $2,500 (new rules)

2008 – $2,500

2009 – $2,500

2010 – $2,500

In 2010, the couple has $2,500 of contribution room for the current year plus $9,500 of contribution room from previous years.

Since the rule is that you can only contribute up to $2,500 of previously carried over contribution room each year in addition to the current contribution room, this means they can contribute this year’s amount ($2,500) and another $2,500 for a total of $5,000, which gives a grant of 20% or $1,000 for 2010. Since they only used $2,500 of their available $9,500 of carried over contribution room, they now have $7,000 in contribution room to carry over for the future.

  • In 2011, they can contribute another $5,000 for a $1,000 grant. $4,500 of contribution room is carried forward to the next year.
  • In 2012, they can contribute another $5,000 for a $1,000 grant. $2,000 of contribution room is carried forward to the next year.
  • In 2013, they can contribute only $4,500. $2,500 from the current year plus $2,000 they carried over from the past.
  • In 2014 and beyond, they can only contribute $2,500 each year and expect to receive the full grant of $500.

Summary of contributions they can make to get all the government grants:

  • 2010 – Contribute $5,000, receive $1,000 grant, $7,000 of unused contribution room
  • 2011 – Contribute $5,000, receive $1,000 grant, $4,500 of unused contribution room
  • 2012 – Contribute $5,000, receive $1,000 grant, $2,000 of unused contribution room
  • 2013 – Contribute $4,500, receive $900 grant, $0 of unused contribution room
  • 2014 and onward – Contribute $2,500, receive $500 grant

Please note there are special RESP contribution rules for 15, 16 and 17-year-olds.

RESP family plan contribution allocations

If you have a family plan with two or more beneficiaries, you need to allocate each contribution between the beneficiaries. For example, you might want to set up all contributions to be divided equally between the account beneficiaries. Or you might have a particular contribution that should be allocated to just one beneficiary. You must set the allocation so the government can track the grants for each child.

When you open an RESP account or add a new beneficiary to an existing account, you can set up the default allocation to split the contributions equally among the children on the account. If you want to make a contribution with a different allocation, you have to indicate this on the purchase order.

More detailed RESP information

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

Categories
Announcements

Getting Fired

For those who may have missed the announcement, krystal from “Give Me Back My Bucks” was fired last week. I’ve been wanting to write something on her blog, or e-mail her, or post something but have been holding off as the last thing I want to do is make her feel worse (so its more important than usual to actually make sure I express what I want to convey).

To shift the conversation back to me (which I love to do), I’ve been fired twice. I’ve “mutually gone separate ways” from other jobs / contracts more than twice. It sucks.

I was sitting around one time with a group of people (this was after I’d been fired once), and they were all stating with pride that they’d never been fired. I kept my mouth shut and nodded approvingly as they patted themselves on that back. This felt really crappy.

To shift from a depressing topic to a more depressing topic (happy Canadian Thanksgiving!) supposedly miscarriages are far more common then people realize. No one talks about them, so people are shocked when they lose a baby, then traumatised and they never talk it. This makes it even more painful for couples in the future who go through the same thing without warning (its a vicious cycle). I think getting fired is similar. Lots of people probably go through it, then they keep their mouths shut and don’t talk about it. Then people who do get shit-canned feel like they’re the only ones its ever happened to and that makes them feel even worse about an already crappy experience.

After getting fired the second time I had, not necessarily what I’d call a breakdown but definitely an “extended period of self-reflection”. I spent about 6 months playing Everquest, drinking instant french vanilla coffee and eating bagels with cream cheese (I wasn’t working and lived off of my savings during this time).

I think possibly these two negative experiences early on contributed to my aversion to 9-5 work and why I want to ideally be financially self-sufficient, or at the very least be captain of my own ship when it comes to earning a living. To this day, if I’m having a bad day and I see “higher ups” at a company I’m working at talking discretely I start getting paranoid.

Getting back to you Krystal. You’re a super-star! Your blog is proof of what a great communicator you are, and you shouldn’t doubt yourself because some silly people at a company thought you needed to be part of their clique. As much as North American society puts a large emphasis on our job and skills in our chosen profession, you’re more than what you do, and don’t let arbitrary staffing decisions at some company lead you to doubt yourself. Perhaps this company is being incompetently run, maybe they’re total idiots who are hurting themselves by letting you go, only time will tell…

Its great that you’ve jumped right back on the wagon at your old position, it sounds like they’re happy to have you back, which says nothing but good things about you. Perhaps 10 years from now you’ll look back and decide that not wasting any more time at your old company is the best thing that ever happened to you. I’m doubtful (having gone through the experience myself) that spending a lot of time doubting yourself will lead you to any great insights or understanding. Bad things happen to good people unfortunately.

Happy Thanksgiving Krystal and congratulations on the terrific person you are and all the wonderful things you have to be thankful for!

Categories
RESP

The Big RESP Series

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

I decided to do a detailed series on the RESP program available to Canadians (my apologies to our non-Canadian readers). This topic has been covered by other blogs and myself in various posts but it’s really a topic for several posts. The tricky part of planning this series was to make it long enough to contain most, if not all of the information an investor may want to know about RESPs but not so long that no one would read it because it would contain too much useless information. My plan is to post this series once a week. This first post briefly explains what an RESP is and the various topics I’ll be covering in the series.

These rules are valid as of 2008.

What is an RESP and how does it work?

Registered Education Savings Plan accounts are government sponsored accounts that you can set up at most brokerages, banks or through a financial advisor. You can contribute money into the account and you will get a 20% grant from the government up to a certain amount. There are no taxes payable on investment income during the life of the account so any interest, capital gains or dividends will not be taxed. When the money is withdrawn to be used by a student then it is taxed in the hands of the student, however the original contributions are not taxed upon withdrawal. If the child does not go to school then the plan is collapsed and there are extra penalties to be paid on the plan.

I’ll be covering the following topics in this series. They won’t all be separate posts but some of them will be. Feel free to send me a question or topic if I’ve missed anything.

  • Contributions and CESG – rules and regulations.
  • Other grants – Canada Learning Bonds, Alberta (ACES) plan.
  • Withdrawals – how they work.
  • Eligible Institutions.
  • Plan Collapse – what happens if the student doesn’t go to school?
  • How to set up an account.
  • Pooled plans.
  • Asset allocations and sample portfolio.
  • Accounts – individual and family.
  • Financial analysis of resp vs. non-registered accounts.
  • My suggestion for a better RESP program.
  • How to deal with problems with your accounts.
  • RESPs – Keeping them in perspective.

See the next post – RESP Contributions.

Categories
Business Ideas Frugal Investing

Recession Investing

Apparently Alan Greenspan has gone on record saying a recession may be coming.  He doesn’t think its likely (less then 50% chance), but its a possibility.  Others (also mentioned in the article) think a recession is far more likely to hit other economies/markets.  This got me thinking, if a recession is coming or has hit, what are the best places to put your money in such an environment?

A recession, according to the first line in Wikipedia, “is a decline in any country’s Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year.”

Following some Googling, it seems that stock prices are hit just about immediately at the beginning of a recession, so having cash on hand to buy would seem to be a prudent move.  Also, since unemployment often skyrockets, having some sort of emergency, easily accessed funds for living would be worthwhile (either in a high yield savings account or with a unsecured LOC set up if you live in Canada).  Supposedly 3-6 months is the recommended level of funds.  This assumes you’re a wage-slave, if you’re not, congrats – no worries on this front.

Clearly if we’re buying stocks at a discount, we want companies that are going to weather the down-turn, so “blue chips” are probably even more appealing in this environment.

Luxury spending will decrease, so focusing on businesses that supply the necessities of life would probably be preferably to companies that supply luxury or optional goods (Loblaws might be a better buy then Leons).

Moving beyond stocks, with everyone afraid to spend money, what might be some other opportunities for good deals?  Real estate will probably be offering good prices (since anyone who needs to sell will have trouble finding buyers).  Connected to this, REITs might be on sale (since their inventory will be undervalued, but their future prospects should be good after the recession ends – they provide a necessity, shelter, so they’d probably be worth considering).

As much as interest rates sometimes go up during a recession, I don’t think GICs or bonds are the best purchase (as you’ll be heavily taxed on these high rates while inflation will be rampant if the rates skyrocket).  These *MIGHT* do ok in a RRSP account, but I still wouldn’t like the bite inflation always seems to take out of them.

While buying companies that supply luxury goods is a bad idea, it might actually be a good time to buy luxury goods if you’re able to accurately appraise them, since there won’t be many buyers.  If you know how to value artwork, comic books or vintage cars, a recession *may* be a good time to hunt for bargains.  Liquidation sales from failing businesses might be another lucrative (if depressing) strategy.

As counter-intuitive as it may sound, a recession MIGHT actually be a good time to start a business (assuming you had lots of capital and could keep costs low).  You should be able to get a cheap lease at a good location (no competition and lots of sites available), easily hire skilled, motivated employees (high unemployement), cheap supplies (again, low demand), etc, etc.  This could be a bit of a dangerous gambit (you’re counting on the recession ending before you run out of money).  If you’re *already* a business owner and you have a pair of steel ones, this could be a great time to expand on the cheap.

Investing in education, while always a good idea, is even more appealing when the job market is tight.  I said to myself that I’d go get my Masters when it became hard to find a job, and that’s exactly what I did when the dot-com boom went bust.  16 months later, when I was coming out of the program, things were starting to pick up again.

Some people talk about gold being a great inflation hedge (and maybe its good during recessions too, I don’t know).  I don’t like gold.  I’m too worried about a cheap method of converting lead to gold being developed and immediately devaluing it.

Travel (and other luxury goods for your own consumption – not investments) are also bargain priced during recessions and “states of emergency”.  Supposedly you could go to Thailand super cheap during the SARS epidemic.  You’re worried about catching SARS if you go?  During the height of the “crisis”, people were three times more likely to die of pneumonia than SARS, and even the people who contracted it had an 80% survival rate. SARS was devastating for Toronto tourism, but was basically a non-issue from a health standpoint (far more people died from car accidents than SARS during the “epidemic”).  You could have had a very nice trip here during that time (short lines and cheap rates).

Categories
Real Estate

Anecdotes and Advice from a First Time Home Buyer Part 1 – First Steps and Pre-Approved Mortgages

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.

And so the search begins…..

It goes without saying that home ownership is an enormous financial responsibility, and like many other individuals, I agonized over how my husband and I would be able to afford it. What eased our anxiety was coming up with a manageable monthly amount that we would be able to pay towards a mortgage. We created a realistic budget listing all our expenses to evaluate how much we could afford to spend on our first house without stressing out about the big number. The rough amount that we arrived at is one with which we are comfortable based on our lifestyle. I would suggest that this budget take into account unexpected emergencies or financial difficulties. Lenders advise that the ratio of your debt (including housing payments, car payments, credit cards and utilities) to your income should not exceed 40 per cent of your monthly income.

Online mortgage calculators are a useful tool found on the web pages of CHMC, major banks and lending institutions. What was frustrating though was that they work on the premise that you have a house in mind and know what the mortgage, property taxes and heating will cost. To plug in the numbers, I looked at the feature sheets of recently available homes in my desired neighbourhoods that I was able to obtain from the MLS, on the websites of local real estate agents and of course from open house visits. While the results of your qualifying mortgage will not be precise, at least they will be a reasonable estimate of what you can afford.

My next step in arriving at our financial big picture was to get a pre-approved mortgage (PAM) by talking to a couple of banks and mortgage brokers to determine how large a mortgage we could carry and what lending rate we could obtain. A PAM is a financial lender’s guarantee of a particular lending rate for a specified period of time, usually 90 days, based on your income, down payment and existing debts. A note of caution though with pre-approvals. We learned from a realtor that multiple credit checks can be detrimental to your credit rating. If several banks or brokers will be conducting a credit bureau check, do advise each organization about the multiple reference checks. Some lending institutions can also evaluate your mortgage circumstances based on the information you provide without doing a hard credit check.

The standard mortgage discount seems to be 0.9% below prime to 5.35% on a variable mortgage and a 1.5% discount to 5.74% on a fixed rate mortgage. Do shop around though as your assets and liabilities may impact your ability to negotiate a better deal. Incidentally, ING offers the same rates I found upfront without any haggling; they seem to have a very competitive mortgage product.

Rather than approach banks individually, you may consider using a mortgage broker. These are companies which have the ability to negotiate with a large number of different lenders and are often able to offer a lower rate at a bank than the average person. There is no cost for the services of a mortgage broker as it is the lender whose deal you accept which pays the broker. The Financial Services Commission of Ontario has a list of registered mortgage brokers on their website.

My husband and I have decided not to go the mortgage broker route yet as we have a PAM with a reasonable rate. We will be checking with other banks as we also want to determine what rates we can negotiate as we are also thinking of moving over our line of credit and bank accounts. The other thing that we learned is that you may be obliged to use a mortgage broker that does a full PAM and rate comparison for you even if you do eventually find a better rate elsewhere. Not sure about the veracity of this information; however it is something to verify upfront with a mortgage broker. As it could be months before we find a house, we are taking our time about finding a better rate since our PAM is reasonable and will help us be competitive in the case of a bidding war.

Read the next post in this series “Down Payments and Financing“.

Categories
Personal Finance

Mr. Cheap’s October Networth

There seemed to be renewed interest in my networth, so I’ll put that back into “the mix”, but preface it every month as being unimportant.

It was a good month to be a Cheap in September (from a financial perspective). I managed to get my last check out of the recruiter (which was quite a trial and may make for a future post). I also got my first check from my new job, so as much as I was worried the “lag time” of pay would hit me, I managed to avoid it.

I managed to save $4062.54. There was also a $739.64 increase in the value of my E*Trade account (this is totally irrelevant, I’m holding these stocks for the long term for dividends, not looking for short term capital gains). My networth increase seems to be pegged at about $4800 (which, to stress for a third time, is totally irrelevant for anything), for a current networth of $91,654.11).

My savings rate is going to start decreasing (because of tax withholding as an employee), but this will also decrease my tax obligation in April, so its all good (as Casey Serin would say).

In September I pursued a variety of long-term, delayed pay-off investments, so unfortunately didn’t make any progress on increasing the proportion of my cost of living being covered by passive income (which currently is at $300.08 or around 26%). My passive income increased slightly because I paid down my margin account due to a false margin call.

I managed to get my cost of living down to $1,151.75 (this decrease is what lead to the “increase” of my passive income paying 2% of my living expenses, which I don’t think is actually going to be sustainable), which will go up after I move into an apartment at the end of October (one of my roommates has annoyed me to the point that I’m moving out). I’m paying $500 / month for a room in a 3 bedroom house and want to find a bachelor for ~$700 / month on the subway line as close to downtown as possible (I work near Union station if anyone wants to suggest a place to live 🙂 ).

One “delayed payoff” investment is my dividends, which are heavily margin-ed now (about 60%). The dividend payments pay off the interest debt (its “cash flow positive” by roughly $33 / month). As long as the dividend payments increase faster then the interest rate raises this should work out well. If it doesn’t, it won’t be a tragedy (I have the income to cover the debt interest). This changed the dividends from being something I was getting a monthly income from, to something that pretty well moves along on its own steam (which I’m optimistic will lead to a higher income later).

The other “delayed payoff” is being a silent partner in a mixed use building purchase (the purchase of which is set to go through in early October). This was $12.5 K so far (which pretty well wipes out my free cash, there’ll be another ~$5 K payment for legal fees). I’m not looking for monthly income from this, as our plan is to save up more in the building’s account, use this to renovate, and convert the building from a rooming house type structure (which it is now) to a bunch of individual apartments (which hopefully will be more lucrative and less work going forward). We’re hoping to immediately change the downstairs bar from being kind of a dive to a higher end place (our ideal clientele would be local business workers going for lunch or an “after work” drink). My “active partner” will be paid 10% of the gross rent for doing all the management (and we’re putting money into the venture on a 50/50 basis).

This is definitely a new sort of venture for me (and hence a bit scary), but my partner is a guy I’ve known for years (he’s been my real estate “mentor” if you’ll forgive the “get rich quick” lingo). I was in his wedding party and have hopes that it’ll work out well (although if it goes belly up, I’ve already categorized this as a “higher risk” investment). He has a wide variety of residential management experience, so I’m also hopeful that he’ll have the background to transition into managing a different sort of residential (rooming house) and commercial (a bar and a retail outlet).

So there’s the “state of the Cheap Union”. My plans going forward (after paying the upcoming legal bill) are to start focusing on my RRSP contributions (looking for about $14K for 2007) and saving to pay off my April tax bill (which I’ll ballpark ASAP to make sure I have enough to cover it). I’m torn between doing a mix of US market / EAFE index funds for my RRSP or getting a couple good US dividend payers (BAC & WM look good right now, and I’d be tempted by something long term like JNJ or KO). I keep advocating index funds to friends and family, so part of me feels like I should actually buy some myself :-).

I’ve mothballed the idea of buying more real estate in 2007. It *might* be possible to get something with a very low down payment (especially now that I have a regular job and am not a contractor any more), but I think the stress of pushing my finances that far wouldn’t be worth the benefits.

Categories
Personal Finance

Why Over Insuring Is Like Buying Lottery Tickets

In a previous post I indicated a simple formula that can be applied to determine how much life insurance you need. I also went through a real life example (moi) and talked about how you should try your best to calculate how much insurance you need (and how long you need it for) and only buy that amount or even a bit less since your financial situation should improve over time which will lessen your insurance needs.

Sometimes people are tempted to buy large amounts of insurance because they want financial freedom if their spouse dies. Or in some cases they really believe they need an excessive amount of life insurance.

In my opinion the best level of life insurance is an amount that ensures that the surviving spouse can maintain their current lifestyle. Typically a million dollar 20 year policy will provide the surviving spouse with a large increase in their standard of living. Now you might be thinking that the monthly premiums are not that much larger for a million dollar policy than say for $750k but those monthly amounts add up. As well, getting a million dollar policy for 20 years will result in a lot more premiums being paid compared to someone who gets insured for $750k for 10 years and $250k for 20 years.

The problem is that they are paying extra money for premiums for extra insurance that will increase their standard of living. The reality is that they are extremely unlikely to collect this money so this extra money is similar to buying lottery tickets where typically someone might take a small amount of money ie $25/month and play the lotto in hopes of an unlikely payoff which will result in an increase in their standard of living.

The best insurance you can have is financial independence which is usually a long time coming for most of us but saving even $25/month on insurance premiums will hasten its arrival.

Categories
Announcements

Linkfests

Just a few links to posts that really stuck to my mind lately:

Violent Acres, who is easily my favourite blogger came out with this gem recently. I should warn you that her posts are not for family viewing. It’s a bit early but that post might be the post of the year for me.

PaidTwice attempted what I consider to the be the ultimate test in black belt frugality – Making her own baby wipes. As a relatively new father (13 months), I would rank this feat up there with jumping the Snake River Canyon or perhaps sewing your own seat belts. It didn’t really work out for her, but she sounds like she will give it another shot.

The Baglady wrote about her SuperDuperUltraCheap x-boyfriend. This guy puts Mr. Cheap to shame, and I have to agree with Baglady that she made the right choice. There’s something wrong with that guy!

I was in the latest Carnival of Personal Finance hosted by Blunt Money. My interview with favourite reader “Telly” regarding her situation of living in Canada and working in America was listed in the Carnival. I have no idea what “Blunt Money” refers to but she did a pretty good job with hosting the carnival and even created a special puzzle which was quite nice.

This material is original.