RESPs? Tell me what it means to me

[81MC]

My understanding of RESPs is as such:

Gov grants 20% of the first $2500 annually through the CESG, up to lifetime max of $7200 (EAP). Assuming beneficiary withdraws for education, the grant and any interest earned is taxed at their rate, plus 20%. Contributions (PSE) are not tax deductible. If beneficiary does not use for education, grant money is forfeited.

The plan subscriber can withdraw any amount at any time, with the respective amount of grant money and contribution room lost.

So, 20% return sounds pretty good, but it’s actually more like 16% once the EAP is taxed when withdrawn to fund education? I’m pretty sleep deprived and haven’t done the math, but is there an income level where it doesn’t actually make more sense to max out RRSP contributions, using the tax shelter to fund a regular savings account for child’s education?

Suggestions on tracking down the best plans? GICs offering like .5% seem like a bit of a joke to me, but I’m absolutely not in the position I should be regarding financial intelligence. Also, no, I don’t have thousands of dollars in disposable income to play the stocks instead.

[Slava]

You’ve got the gist there. If you invest this (and why wouldn’t you if you have ~18 years until it’s going to be used), and add that return to the grants and it’s a pretty solid arrangement. I’d caution you from things like GICs personally speaking, and in the same vein, I’d steer far clear of the scholarship arrangements.

If you want any help, feel free to PM me and I can lend a hand.

[GGG]

Not in anyway an expert but here is where I got to.

The 20% match is essentially free money. Contributing more than that amount doesn’t make sense.

If you use RRSPs to fund you would have to take the money out as income in the year you want to use it, it would be taxed at what ever income rate you are at and you wouldn’t get the contribution room back. (There might be away you can pull it out tax free but you would still need to pay it back with after tax dollars). So unless you plan on earning substantially less in the future using RRSPs is a bad idea.

A TFSA could be an option as the growth is sheltered. If you aren’t maxing your TFSA and your child chooses not to go to post secondary then this is best option. Any amount beyond the grant level of savings should go here instead if you have room.

As for where to invest a target date fund for the year your kid graduates is an okay option. Higher risk early on and gradually reducing the risk.

[Krovikan]

Your rate if return isn't 20%, your rate of return is whatever investment vehicle you have on-top of the 20%. My son's I believe is returning similar to my RRSP, about 10%. So your yearly RoR would be government contribution for that year (20%) plus that years growth then divide that by your investment.

When I talked to my bank about pulling the money from the RESP for non-school purposes, you'd forfeit the government portion and keep and pay taxes on the growth.

I treat my the same as my employer RRSP plan, reviewing my risk level periodically and just contribute regularly and largely don't pay attention to it much.

Another benefit, according to banks, they consider it your asset until your child starts drawing from it. Which could help you risk profile when going for credit.

I'm not a fincial advisor, this is just based on my experience and discussions with fincial advisors.



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[Izzle]

Also, depending on the financial institution, you might have to pay an RRSP withdrawal fee over and above withholding taxes. No such fees when the cold starts withdrawing for education.

[Wormius]

I believe the contribution sweet spot is $210 / month if you can do it.

[Samonadreau]

Ive been contributing for a while now but never managed to crunch numbers for the sweet spot or where you stop getting any more gov contributions. Dumb question though, does it matter how many children are set up under the RESP? Mine are all set up under one RESP Account and I'm contributing 300/month (75 per child)

[Slava]

Originally Posted by Wormius

I believe the contribution sweet spot is $210 / month if you can do it.

Well the $208/month puts you at that $2500/year maximum. If you’ve started in the first year for the child, that’s the maximum to get the full grant.

Originally Posted by Samonadreau

Ive been contributing for a while now but never managed to crunch numbers for the sweet spot or where you stop getting any more gov contributions. Dumb question though, does it matter how many children are set up under the RESP? Mine are all set up under one RESP Account and I'm contributing 300/month (75 per child)

You can use a family RESP as opposed to an individual and it’s completely fine. I usually recommend this route because if one child goes to post-secondary and another doesn’t, you can use the RESP for that child.

[Scroopy Noopers]

This is the thread title of the year.

[Fuzz]

Originally Posted by Scroopy Noopers

This is the thread title of the year.

Let's not get hasty, we still have 2 days to go.

[The Fisher Account]

Can you maximize all the grants if you you do less than $2500/year? I assume they don't penalize you if you only do like $100/month and it just takes you longer to hit those thresholds?

[GGG]

Originally Posted by The Fisher Account

Can you maximize all the grants if you you do less than $2500/year? I assume they don't penalize you if you only do like $100/month and it just takes you longer to hit those thresholds?

You only have until 18 to hit the max. So you need to hit something like 175 per month from birth to max out the grant money. If you haven’t used all of your grant space in previous years you can make up contributions to capture it but there is some limit on that.

[bagofpucks]

For us, it’s the best investment option and if we had to make a choice we’d try and maximize it before other investments due to the government contributions. We are generally passive investors and we just use a target date fund. We have two kids and have a family RESP for reasons as mentioned above. I know lots of folks use the monthly payment option and it’s a great idea for lots of reasons, but I’m more of a lump sum saver, so I just plop in the $5K when the cash flow makes most sense for us. The only thing I wish was a bit easier was if our family could just make direct contributions to the account, but I guess that takes some work to set up? I’ve never fully understood that aspect with our institution. And this was a great reminder, I need to set up some bank accounts for the kids in the new year.

[Slava]

Originally Posted by The Fisher Account

Can you maximize all the grants if you you do less than $2500/year? I assume they don't penalize you if you only do like $100/month and it just takes you longer to hit those thresholds?

Originally Posted by GGG

You only have until 18 to hit the max. So you need to hit something like 175 per month from birth to max out the grant money. If you haven’t used all of your grant space in previous years you can make up contributions to capture it but there is some limit on that.

The maximum you can put in and receive the grant is $5000/year per child if you have years where you didn’t deposit the maximum. There are rules around deposits for children who are 16/17 though; you need to have deposited at least $2000 before the end of the calendar year where they turn 15 to get the CESG for those kids.

[Slava]

Guess I should also link my sub forum here and the thread I have on RESPs… https://forum.calgarypuck.com/showthread.php?t=169506

[d00little]

Originally Posted by GGG

Not in anyway an expert but here is where I got to.

The 20% match is essentially free money. Contributing more than that amount doesn’t make sense.

If you use RRSPs to fund you would have to take the money out as income in the year you want to use it, it would be taxed at what ever income rate you are at and you wouldn’t get the contribution room back. (There might be away you can pull it out tax free but you would still need to pay it back with after tax dollars). So unless you plan on earning substantially less in the future using RRSPs is a bad idea.

A TFSA could be an option as the growth is sheltered. If you aren’t maxing your TFSA and your child chooses not to go to post secondary then this is best option. Any amount beyond the grant level of savings should go here instead if you have room.

As for where to invest a target date fund for the year your kid graduates is an okay option. Higher risk early on and gradually reducing the risk.

It's still a tax-sheltered vehicle. If you have already maxed RRSP and TFSA it's still a decent option if you are fairly certain your child is going to be able to use the RESP.

I was thinking of doing the strategy where you front load the RESP ($16,500 child's first year) then $2,500 each year until you hit the $50k lifetime maximum and $7,200 CESG maximum match.

[RichieRich]

Take the free 20% and do what you can to make it happen. Do NOT even consider GICs even for yourself as they’re a net loss as they’re taxable income plus don’t match inflation so you actually lose money. You’re literally better off putting it under your mattress.
Also don’t do the crazy subscription high cost programs that get pushed on you when the vultures look at the birth records. LOTS of stories of people losing lots of money there.

Really this RESP thing is not hard. We went through ATB for a self directed family RESP and self select from their very good group of funds, which have the lowest MERs around for banks and credit unions plus an excellent track record. No, not as low MERs as ETFs but we’ve averaged over 10% annually for over 10 years for very little effort. The other thing is, just like most people here, you have a long runway so do not be overly conservative.

[GreenLantern]

We've set this up for our kids, hitting that sweet spot to maximize the government return. My wife had it from her family growing up, I did not and had to go the student loan route.. needless to say there is a very large difference in finishing school debt free vs. owing the government for 10+ years.

Your kids will be very thankful and it will put them that much further ahead of where you were.. which is the point of all this isn't it?

[bizaro86]

Originally Posted by d00little

It's still a tax-sheltered vehicle. If you have already maxed RRSP and TFSA it's still a decent option if you are fairly certain your child is going to be able to use the RESP.

I was thinking of doing the strategy where you front load the RESP ($16,500 child's first year) then $2,500 each year until you hit the $50k lifetime maximum and $7,200 CESG maximum match.

If you're already maxing out RRSP/TFSA room contributing more than the grant is better than non-registered money from a tax point of view.

The taxes are deferred for quite awhile (like an rrsp). The big caveat is the money belongs to your kids. They has advantages (anyone doing this is probably in a higher tax bracket than their early 20s kids) with thr potential disadvantage that they get to spend it not you if you needed it.

[albertGQ]

I have my RESPs with Slava (as well as my TFSA, RRSP and life insurance)

I highly recommend him. Send him a PM