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Monday, September 22, 2014

RESP Or Getting Free Money

Posted by Tim Stobbs on April 28, 2014

You might have noticed that on my investment net worth statements I NEVER mention our RESP account we have setup for our kids.  The simple fact is I treat that money as theirs and that I’m only the caretaker of it.  So I tend to ignore it for most of the time.  Yet as number of my friends have been having kids lately I keep telling a similar story that might be useful for some other parents out there on how to save rather painlessly for your kid’s education.

I’m a firm believer in taking free money when every I can get my hands on it so for a number of years we filed our taxes and got our government grants for our kids.  The two programs we typically got money from were the Universal Child Care Benefit and Child Tax Benefit.  The Universal is by far the most straight forward, you get $100/month for each kid under the age of six while the Child Tax amount depends on your income but again is paid monthly.

Rather than actually spending any of that money on my kids I treat the entire amounts as free money and I setup a family RESP plan and put the money in that account where we get a 20% grant on what we put in up to $2500 per kid per year.  So in total I started our RESP account for the kids with all government money, where they added in more government money after we put in.  Then as the kids got older I kept the contributions the same and slowly starting paying ourselves after the kids’ Universal Child Care stopped (right now the contribution is $167/kid/month).  The advantage of this method is your income by this point has typically gone up a bit so it is a bit easier to cover it yourself.

Our investment of choice is actually boring as hell, it is just a dividend mutual fund which has returned about 6% since we picked it in 2005.  Yet overall all these actions has resulted their RESP account having a balance of $45,800.  Not too bad when in fact I haven’t put in that much of my own money.  Also this means I’ll likely surpass my target of saving $40,000 per kid, as my oldest is now 9.  So assuming things continue the same pace the kids should have ~$100,000 between both of them when I’m ready to quit full time work around age 42.

Obviously there are several different ways to approach saving for your kid’s education, but I found our method fairly easy to use.  If you have kids, how much are you trying to save?  Are you on track to meet it? Any other ideas on how to save for their education?

Comments

5 Responses to “RESP Or Getting Free Money”
  1. I would do this except that if my kids decide to NOT go to college, I can’t roll the amounts over into my RRSP contribution room because I will have no room to speak of (I take my salary in dividends, not as earned income).

    I am however, considering putting in only up until the actual match each year to get the free cash and then see how much it would cost to take the hit as a regular income withdrawal if they decide not to attend college.

  2. Gotim Himel says:

    There is a disconnect between the most recent RRSP limit and the government top-up that makes this an interesting question.

    The contribution rule has been changed to allow a lifetime contribution per child of $50,000. However, the 20% government top-up only occurs on the first $2,500 contributed annually. What that means is that a $50,000 lump sum contribution would result in a one-time-government top-up of $500 on the first $2,500 and foreclose any future top-ups, whereas with annual contributions of $2,500 over each of 19 years, one could receive a total of $9,500 in government money based on a total out-of-pocket of $47,500. This creates a weird and confusing incentive to save, but not save too much.

    Based on this, I have chosen the easy route – $100 biweekly to each child, i.e., one payment every payday period for $2,600 per child per year. After 19 years, this will result in a total contribution of $49,400 per child (i.e., $600 less than the limit), with a $9,500 top-up for each of them.

  3. Andrew says:

    Gotim Himel – beware maximum lifetime CESG per child is $7,200 – so while maximum contribution is $50,000, only the first $36,000 attracts the 20% CESG

  4. Tim Stobbs says:

    @Gotim,

    Andrew has it correct. You can contribute up to $50K, but there isn’t any grant money to do so. I would personally only put in the $36K to get the max grant money and invest the rest outside the RESP. That way you stay flexible to put the money towards other things…like helping with a house down payment or a wedding if the child’s education costs less than you have savings for.

    Tim

  5. Geoff says:

    I do the biweekly thing for our kid too (td eseries funds). Contribute $2500 a year almost to the penny. My plan is to do that until at least we max out the $36000 contribution limit, and then we’ll see. It’s hard with kids to make super detailed plans.

    Oh re the kids not going to college/university – it seems to me unlikely the kid will not go to any schooling, and resps cover trades, beautician, electrical schools etc. Plus they can remain open for 26 years or something, so if the kid graduates high school and doesn’t do anything for a year (except move the hell out of my house) that’s fine too.

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