“We are setting aside money each month for our children, but we haven’t opened an RESP because we don’t want the money to be locked in for solely education purposes. What if we want to give them the money for a house down payment, or a wedding?”
In this world nothing can be said to be certain except death and taxes…and that kids are bloody expensive!! (what Benjamin Franklin really meant to say)
Just when you stop having to pay for daycare…they start competitive hockey or dance.
Then they insist they need the newest iPhone (again this year).
Then they are off to university…
Then they’re getting married…
Then they’re buying a house…
Then grandchildren need to be spoiled…
And the circle of life continues.
When university costs represent only one bucket in this list, the idea of a Registered EDUCATION Savings Plan (RESP) does seem limiting. It’s also extremely challenging to predict whether your newborn baby will eventually attend post-secondary education. So why lock into the RESP? Why not just use a TFSA for general savings for the future?
Main advantages of an RESP
-
FREE MONEY!
It’s tough to beat this one. For every dollar you set aside each year (up to $2,500 per year), the government will grant you (as a Canada Education Savings Grant or CESG) an additional 20% to a maximum of $500 per year, or a lifetime maximum of $7,200. No investment account can promise you that kind of return on your savings.
-
No tax (or very little) to pay!
The RESP works a bit like the TFSA. All the contributions you make are ‘after-tax’ which means when you withdraw them there is no tax to pay. This is the “Contribution Amount” or the principal. All the gains on your investments (interest, dividends, capital gains) and all the grant money (CESG) are taxed in the hands of the student when the money is withdrawn. This is called “Accumulated Income” or basically, everything else. The student is able to benefit not only from being in a very low tax bracket (depending on the income they make flipping burgers), but also from the generous tuition tax credits which further reduce any taxes to be paid.
Now of course the important caveat to both of these advantages is that the child must attend some form of post-secondary education and as a parent you must submit “proof of enrollment” in order to access the money. The good news is that the breadth of programs that qualify is quite large – everything from apprenticeships to CEGEP.
Also, if you have more than one child, a family RESP will allow you to transfer all or partial amounts between children.
And finally, you have 36 years from the date the RESP is opened to use it. So, don’t give up hope if you raise a little nomad who takes a few years to settle down.
A Compromise Strategy – using both RESP and TFSA
- Baby Susie is born – time to realize you will never sleep again and open an RESP to take advantage of the CESG and tax benefits.
- Contribute as much as you can to the RESP monthly (tip: I automatically send my monthly Canada Child Benefit (CCB) to the RESP to double-down on the free money).
- Continue this process for 17 years.
- Once Susie hits the mature age of 18, she is able to open a TFSA.
- Let’s say Susie is now attending college and the RESP is sufficient to cover her education costs (victory!). Replace your annual RESP contributions with TFSA ones. If you manage to continue your contributions of $2,500 per year to Susie’s TFSA for 10 years (from age 18 to 28) then when she’s ready to get married or buy a home (28 feels like a good average age for these events) you can present the TFSA account to her with a balance of at least $25,000 (or if you managed an average of 5% returns over that period your account would be ~$31,400).
- Rejoice in winning at parenting and money!