033: All About RESPs (Part 2) | Money in Your Tea and Modern FImily

On this episode, we’re continuing our deep dive into RESPs with Kari from Money in Your Tea and Court from Modern FImily. In this second of two parts, we discuss RESP withdrawals, payments, and taxation. Get your notepads ready—we’re once again covering a lot of ground!

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Money Mechanic
Hello, listeners. Welcome to Explore FI Canada, where we sit at the roundtable with Canadians, and share their thoughts, ideas and personal journeys to financial independence.

Chrissy
Hi, everyone. Welcome to part two of our RESP discussion with Kari from Money in Your Tea and Court from Modern FImily. If you haven’t yet listened to part one, go back and give it a listen. We discussed the basics of RESPs, including accounts, contributions, grants, and investments. Today in part two, we’ll be discussing withdrawals and taxation. To start the episode, Kari introduces us to an interesting strategy that could be helpful for a motivated teen.

Chrissy
So Kari, we were messaging back and forth as we were planning this show and you came up with this very interesting scenario that I’ve never considered and I think our listeners and other FI seekers will really appreciate how clever and resourceful it is. So, can you talk a little bit about what you’ve come up with? And I think it’s a great strategy.

Kari
I was trying to think about low income families, we I have friends who haven’t been able to save money in an RESP because they’re a one parent working family and living in Toronto, and it’s an expensive city and you know, sometimes it’s nuts to put that if you have two kids, that’s $5,000 a year and that’s a lot of money if you’re only making say $40,000 before tax. So if you’re a teenager from a family, and there is no RESP for you, I was trying to think this through, you could do this yourself. So if you start at age 14, getting a summer job or part time on weekends, or something like that, you can probably earn $50,000 a year and…

Chrissy
5000?

Kari
… worked at it. Sorry, $5,000!

Money Mechanic
That’s a heck of a paper route!

Kari
Yeah, so if you’re a teen, let’s say age 14 or so you can probably get a part time job earning $5,000 per year. So that would be about working one shift per week or working all summer full time. And, you know, maybe you’re babysitting, maybe you’re helping out at a retail store for your parents’ friends or something like that. Or maybe you’re lifeguarding at the wading pool. If you can save that $5,000 per year, you could potentially give that to your parents who could open up an RESP for you and deposit that $5,000 at age 14. That would be your grant for the year that you’re turning 14 plus make up for one previous year that there was no contribution. So that would get you your 20% matching grant for $1,000 that year, and you could keep doing that the year you are 15 and 16 and 17 The last year that the government will give out the CESG is the year you turn 17. So in theory, you could put aside $20,000 and get $4,000 in grants. And if your family is at low income, you may even get the top up grants as well. To add to that, and you’ve lost out on all those years where that money could grow, if you are always starting when you’re in high school, but at least you get the grant which is 20%, free money that you wouldn’t have got otherwise.

Chrissy
That’s huge. And I think it’s an amazing way that a very motivated teen could help to fund at least part of their education and possibly if it depending on what line of schooling they choose, it could pay for all of it. If it grows enough. I think that is so clever. It’s a great way for families who aren’t able to contribute to maybe support their children in financial And helping them to open that account and still coming out quite far ahead.

Kari
Mm hmm. Yeah, if depending on your choices, as you say, if you’re in college, that tends to be cheaper tuition than university, if you’re living at home, it’s obviously cheaper than if you have to go into residence. If you can get a couple of scholarships in there, you could probably graduate debt free or with very little debt. Even with a four year degree.

Chrissy
That’s amazing. I love it. So thank you for thinking of that and sharing with our audience. It might just help someone out there.

Kari
A parents would be the ones in charge of opening the account and making the investment decisions and withdrawal decisions. So they have to be on board with this plan too. You can’t open it for yourself.

Chrissy
Now could it be if for instance, in a household where maybe if the parents aren’t able or willing to help? Could that same teenager go to a grandparent or an aunt and uncle and have this have them open it for them?

Kari
Yeah. For sure, the grandparent or aunt or uncle would need to have the child’s social insurance number. And hopefully the parents are on board with this plan as well. Because, you know, that could make for a rather awkward family dynamic.

Chrissy
Yeah.

Court
The only thing is that, for this to work out, the child would have to know what’s available, right. And if their parent doesn’t have an RESP, for them, they’re likely not going to learn about the strategy through their parents per se. You know, maybe maybe they can, maybe their parents know all about RESPs, but just don’t have the income to be able to open one. But more likely than not, I would guess that if a child is 14 or so and does not have an RESP set up by their parents already at their parents are likely not going to then tell their child Hey, get a job and open up your own RESP but maybe you know, their teacher or their school counselor or a friend or someone is looking out for them their grandparent and is able to offer this idea to them and then they can you know, take care charge of their education at an earlier age and high school and be proactive about it at that age and not have to worry about such a high loan amount of loans, you know, 10 years from then after they graduate school, something like that. So I think it’s a great strategy.

Money Mechanic
So along those lines Court, does this come up in discussions at school? You all have children? I do not. And Chrissy and Kari’s are a little bit older. Does this discussion come up once they’re sort of in their early teens or grade seven grade eight years? I know we talked when I was in school a long time ago, all the discussion was surrounding student loans. It does the RESP come up as a discussion with teachers and counselors.

Kari
That’s a good question. I would say my kids don’t always come home from high school and tell me everything that they’ve talked about in school. And but I do think the schools do talk with the kids about how to pay for post secondary and what their post secondary options are. I know high schools are trying to really push this idea that it’s not university or nothing that trade school or college or apprenticeship are all great ways of getting a post secondary education. And so I feel like how to pay for that is probably a component of that discussion.

Chrissy
Yeah, my eldest, he is in grade nine. And he, he generally tells me quite a bit, but he hasn’t mentioned anything about RESPs. So it could just be that he’s not in the right age range where they’re talking about the stuff yet, so hopefully they do bring it up at school.

Money Mechanic
Yeah, I would hope so too.

Kari
And maybe a little bit more in grade 11 or 12.

Money Mechanic
So for all of you that have kids of varying ages. How does one hear about this program? If your kid doesn’t come home from school? What do you get as a parent to sort of let you know this is out there and it’s happening? Kari, you’ve kind of got the biggest age range kids They’re what’s what did you find back in the day?

Kari
That’s a good question. My eldest is 20. So it’s a long time ago that we set this up. But back before I was even married, I worked at Royal Bank in the economics department. And I remember when my colleagues had small children, and she was talking about the RESP. So I suppose you just mainly hear about it from other parents whose kids are a little bit older than yours. And then you can look online, especially the Government of Canada, of course, has the most reliable information because it’s their program. But there’s lots of information from bloggers like all of us and others out there, too.

Money Mechanic
So Court, how did you hear about it? You’ve got a youngest one of the group here.

Court
Yeah, I mean, I’m trying to think back I’m wondering if there was a little notice or pamphlet in our little Hey, you got a new baby from the hospital like, here’s your take home package type of thing, and it might have been in there might have been mentioned, but I honestly can’t remember that. That’s like, that’s how bad my memory is. And that was only two years ago, like, as embarrassing as that sounds, but I think it’s really like a TFSA or an RRSP, where it’s more like, you have to know about this yourself. Like you need to do your own digging and own research, whether it’s word of mouth through a friend, or family or co worker, or you just look online and you happen to stumble upon it. But I don’t think it’s like information that’s readily out there, which is very unfortunate. And I think, you know, the same could be said about any many tax advantaged accounts out there. A lot of it is more DIY, you need to be on the hustle and want to do the research and learn about these things. And then you discover it, and you’re like, oh, wow, there’s this unicorn investment out there for my kids. I should really get into this. And you might be five years, you know, behind but so be it. You know, I think it’s just unfortunate that a lot of this is not as mainstream as it really should be.

Money Mechanic
Yeah, it’s interesting. And maybe this is the public service announcement that if you’re listening to the show, and you don’t have kids maybe mentioned it to friends that do have kids are thinking about kids, you know, it sounds like word of mouth is an important part of how this message gets spread.

Kari
And that advertisement in the take home package for the hospital was probably for a group RESP.

Court
Yeah, good point.

Chrissy
Yeah. dangerous.

Court
Yeah.

Money Mechanic
See if I’d known you got a how to book when you left the hospital might have changed my mind 20 years ago.

Chrissy
It’s woefully inadequate.

Money Mechanic
Yes, my my sister has three year old twins. I’ve been the proud babysitter, so I’m all fully aware.

Chrissy
Yeah, twins. That’s not easy!

Money Mechanic
Right. Well, let’s pivot the episode a little bit and move on towards withdrawals Court. You want to start the section off for us?

Court
Yeah, sure. So it seems like out there. Once you do learn about RESPs. It seems like whether that’s blogs or articles, there’s a lot of information on the maybe how to set up how to contribute types of accounts that you can or types of funds that you can put in the account, things like that, but I don’t think there’s a lot of coverage on the withdrawal side. And I think Kari having you here and going through the motions At this point with your first daughter, and you know, starting now with your second kid as well, you know, I want to really dig into this and and first question, I guess is who takes the burden of the tax? Like, how, how is the tax structured when you withdraw the money?

Kari
Yeah, for sure. I found this part as well really hard to find information about. And that’s probably why I wrote about it on my blog last year, just because there isn’t as much information about how to get the money out is there is how to put the money in. So if you think about it, there’s like three different imaginary buckets. So there’s the amount that you put in, which is $36,000. If you’re contributing just to get the maximum grant or a hard maximum of $50,000. There’s the grant from the government, which is a maximum of $7,200. And then there’s all all of the rest. So that’s capital gains, dividends, interest, any kind of growth that happens Within that fund, so they’re not like actual separate buckets of money and they can all be invested in the same thing. But they’re taxed differently. So when you withdraw the money, you have to state upfront whether you want it to be from the Educational Assistance Payments, which is a combination of grant and income, whether it’s dividends or interest, or whatever, or whether you want it to be from your contribution. And your contribution you made it in the first place with after tax money, you don’t get a tax refund on that money, like you do with an RRSP contribution. So this is after tax money, you’ve already been taxed on it at your marginal rate when you put it in. So that comes out tax free. All right, that is the grant and the income the capital gains and interest and so on, gets taxed at the students marginal rate as their income so most students in post secondary aren’t making a whole lot of money. So they may not pay any tax on that at all, or their tax bracket.

Court
I think this is what also makes the account a magical unicorn account is that it’s your money, funding your child’s education. And when you’re using it to pay for your child’s education, it’s now in your child’s income. And they are the ones quote unquote, responsible for taxes. But like you said, They’re likely going to be in a low tax bracket and likely pay zero or very minimal tax on this. Whereas if it was you withdrawing, and you were tagging it up with your earned income through your employer, whoever, you know, you’d be in much likely a situation where you’d be in a higher tax bracket than your child. So I think that’s really another thing important to stress is that, you know, what makes this so powerful is that when you’re withdrawing it, it’s very likely that you might end up paying no taxes on what you have to withdraw.

Kari
That’s right.

Chrissy
So I’ll just ask a slightly detailed question because you mentioned something interesting in that families think in terms of income and expenses for the school year, which is September to August. But taxation is actually in the calendar year, which is January to December. So can you tell us more about this? Are there pitfalls that parents need to watch for?

Kari
So the parents are in charge of making the withdrawals from the fund, or whoever has set it up. So it could be the grandparent or whoever, but most times it’s the parent. So the parents say I want to withdraw this amount of money. And I want it to be from either the grant or income bucket or from the contribution bucket and, and the date or whatever. So in the first 13 weeks of school, you can only withdraw a maximum of $5,000 of that Educational Assistance Payments, combination of grant and income. And after that it has to be the contribution that he I guess the government doesn’t want you to get started in university, withdraw all of their money and then quit. And then they’re out all of their money. So I said, I brought that $5,000 cap at the beginning. But I’m sorry, now I’ve gone down this rabbit hole.

Chrissy
It’s the taxation how the taxation doesn’t line up with the school year.

Kari
Mm hmm. So, in that first school year, in the first term, the first 13 weeks, you can only withdraw $5,000 which would then be taxed under the child’s income and any additional withdrawals are from the parent contribution, which have already had tax paid on that. So then, um, and then after that, you’re basically in school in the winter term, working for the summer term and in school for the fall term. And as long as you keep up that pattern, it probably doesn’t matter so much when you take things out, but you don’t want to take out all of the Educational Assistance Payments at once because then you might push them into paying more tax. You kind of have to balance it a little bit,

Chrissy
I see what you mean. So you’re saying to not necessarily take it all out in the front end, because then you’re possibly pushing your your child into a higher tax bracket. But whereas if you spread it out into two separate calendar years, it might make the tax burden a little lower. Mm hmm.

Kari
The other issue is if you’re in a program that has a co op, and let’s say your co op runs from September to August, so you’re making pretty good income and your co op. So you have a smaller income for the fall term of that co op. And then because you have more months of your co op in the next calendar year, where you’re working from January to August, so you probably want to focus more on your contribution withdrawal in that year, because that’s already been paid taxes paid on it, and more of the grant an income withdrawal in the beginning half where you have lower income than that calendar year.

Court
That all makes like, so much sense and just adds, you know, to the intricacies of what you need to think of. And then to add on top of that, is the fact that you also want to ensure that you’re utilizing all of the EAP payments, because that’s where your grants and your earned income and interest comes from that if you don’t utilize it, that’s where you may get assessed with a 20% penalty. Whereas if you don’t utilize the contribution room that the subscriber contributed, that’s all tax free. So it’s like playing this puzzle, right? You want to utilize all the EAP payments over the course that you’re in school, but you want to do it in the wisest fashion for tax purposes year over year.

Chrissy
Yeah, that’s right now can we can we just take a step back and explain the different types of payments and what the acronyms mean?

Money Mechanic
Thank you for doing that.

Kari
Sure. So there’s the contribution that you put in as the parent. And then the Education Assistance Payment is a combination of the grant and the income and the income is interest, dividends, capital gains, any way that that money has grown from, you know exactly how much you put in, which would be, say $36,000 just trying to maximize the grant or $50,000 if you’re going right to the end, and you know exactly how much the government has put in as a grant $7,200 if you’ve maximized all of that, so everything above that is income, whatever that may be, and that combined together, the grant and the income is the Education Assistance Payment.

Court
Okay, so the EAP side is Educational Assistance Payment that makes up the grants and any earned income that you have from within the count as your investments grow, right and then so the PSE side, that’s the Post Secondary Education payments, right. And so that’s essentially what you the subscriber are contributing year over year into the accounts, whether it’s the $36,000 to get the max match grants from the government to get the max $7,200 or the full $50,000. But that number what, whether it’s the 36 or 50, or whatever it is you choose, that’s what we mean by PSE or Post Secondary Education payments, right.

Chrissy
So those are your contributions.

Court
Right.

Kari
That’s right. I should add one other thing when you’re withdrawing and your withdraw from the Educational Assistance Payments, is that it withdraws proportional to the current balance in each category. So if you had say, $5,000 left in your grant, and $15,000 left in your income, and then you’re withdrawing $1,000, it would take a quarter of that out of the grant and three quarters of that from the income. You can’t say I want to take all of the grant and leave the income behind. It comes out proportional together, those two and then the PSE or the contribution payment comes out separately.

Chrissy
Okay, and so the PSE that you choose to take out, it’s not tethered at all to the EAP. You can take out any amount, is that correct?

Kari
That’s right.

Chrissy
Okay. So what I guess it’s your money so they don’t care. You could take out all of it if you want to just could you do that?

Kari
If you guys and in fact the PSE is your money so it can come back to you yourself as the parent. Or you can say, bank, I would like you to give this money into my child’s account. The EAP has to go into the child’s account. So one of my friends gets the PSE paid out to her and she makes her son come home for dinner every Sunday night and gives him his allowance for the week. And that way she’s guaranteed to see him.

Court
I love that.

Chrissy
That’s cute. And now just to clarify further, the PSE does that Yes, it’s your money. Do you still have to prove that you’re using that for post secondary expenses? Or can you do anything you want with the PSE money?

Kari
I’m pretty sure you can do that anything you want. So if you’re behind on your RRSP contributions, in theory, you could say, I’m going to keep the PSE payments for myself and top up my RRSP. Because now I’m 55. And I need to do something to save for my own retirement. And you can have all the rest.

Money Mechanic
So my head’s spinning a little bit here, so I’m gonna… No, no, it’s really good. But I’m on the show for a reason, because I don’t know anything. So I’m going to walk this back just a little bit, just so I know, make sure I have it clear in my mind, because we talked about some acronyms there that I’m not familiar with. So I’m thinking of this in a two buckets situation where one bucket is all the money that I physically put into the account. And the other bucket is a combination of the government grant and any capital gains, dividends or interest that were earned in account. And I just want to clarify that when you withdraw, if you take it out of the bucket that was not after tax money, which is the gains that you said comes out as a proportion between the government grant and the gains, is that correct? Yes, that’s right. And then the other bucket, which is the PSE or your contribution, like Chrissy just mentioned, you said that you can do whatever you want with it. So okay, good. I got that straight. This leads me into the question of what that withdrawal process looks like. And I get that there’s some tax implications, and you’re going to want to sort of manage that. And it’s interesting because we don’t really talk about RESP meltdown strategies, but here you are with a child having to sort of do a meltdown strategy for this, RESP so what does that withdrawal process look like for you? And what do you choose to use those withdraw funds for? Are there specific things that you have to allocate them to?

Kari
As far as the mechanics of drawing it down, I just email our banker and say I want to take out this amount of money between these two buckets. And also where I want that to come from. So which GIC it’s coming from or what other if it was still in mutual funds or ETFs, or stocks or whatever, whatever you want to sell in order to take that out. If it’s in a DIY account, then you probably have to sell out yourself into cash before taking it out. I’m not quite sure because that’s not how my eldest account is set up yet. As far as what qualifies for expenses, basically anything that’s related to the cost of school so tuition, obviously books, rent or residence costs, meal plans, even any other eating out so you know, he stopped at Starbucks on the way to class, public transit or gas if you’re driving your car, and computer or any other tech or supplies for class

Chrissy
What if your child lives at home and you charge them rent with, would that count?

Kari
That’s a good question. I’m not sure about that. I am. But they also don’t ask for receipts or any proof of what you’re spending that on. So it’s not like you have to keep track of every receipt from Starbucks, because who does that? And unless you’re spending more than $20,000 a year of your RESP, then they just trust that you’re using it for school costs.

Court
Would furniture costs, as well? Like to furnish your room or your apartment or whatever it is, if you’re not living at home, would that count to something? Do you know?

Kari
Yeah, I think it probably would. Again, they don’t ask for receipts. So if you just say, I need $10,000 this term and they just transfer you $10,000 you do have to provide proof that you are in post secondary education every year. In order to keep getting those grants or withdrawals.

Court
This is just screaming Canada to me as a dual citizen like like this is so honor system and it would just I feel like this would not fly in the States but…

Kari
Yeah, we just trust you!

Chrissy
Ours was a family account, because for me the benefit of being able to shift money from one to the other. I mean, you can’t shift the grants but all the other money, the gains and our contributions can be then allocated to either child. For me that gave me some peace of mind to know it was more flexible that way. But I can also see in Kari’s situation and others that I’ve spoken to where when you have quite a large spread in the age of the kids that would be too much of a headache to manage as far as investments and keeping track of everything so I can see the benefits of both but my kids are about two and a half years apart and so it made sense for us to have a family account.


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Money Mechanic
It sounds like it’s relatively easy that you’re not having to track everything. But it also sounds really complicated from a perspective of how do I know how much out of each bucket, what taxes are going to be involved, especially if my child’s come. University age has some sort of form of part time income. Is there some sort of guide out there for parents, Kari, is there somewhere that people can go that kind of gives them some coaching on how to break this down and withdraw successfully?

Kari
I wish it were that easy, actually. And, yeah, there’s really not as much information on withdrawals out there, as I would have liked to see when my eldest child was going into university. I think basically talking to your bank or whatever financial institution you’re at, to get a little bit of advice on the process of withdrawing and just researching online And looking at bloggers and see what they’ve written or a lot of times, they’ll be articles in the paper around the beginning of going back to school time. Money Sense has regular articles on rec withdrawals, things like that.

Chrissy
So I read a book a few years ago, and it’s called The RESP Book by someone named Mike Holman. And I remember it being really easy to read, and it was excellent. But again, it was quite light on the withdrawal stuff, because that was what I was most curious. In, because that is where the info is the most lacking. So it well, it was a good book. I agree with you, Kari. There’s a lack of info about withdrawals because it’s quite complex, and it’s something that all of us need more information for. Maybe you can write more about it.

Kari
Yeah, I’ll try. I think part of it is trying to look ahead to so if you’re looking at your child’s education plan, do they have a co op term coming up? When is that and trying to make your EAP withdrawals on years that their income will be lighter. And the PSE contribution withdrawals on income on years that their income will be higher, but also managing to use up all of that EAP for the graduate.

Chrissy
Yeah. So I wonder it sounds almost like you need a plan as similar to when you’re retiring to maximize or minimize your taxes, I guess to plan it out to see if you can structure it so that you’re timing things properly, to coincide with your child’s earning income and any other income they might receive.

Kari
At the margins, maybe it doesn’t make any difference because if they’re in the lowest tax bracket, and they pay the lowest tax rate on that, though, dollars this year, instead of next year or last year, they’re still in the same tax bracket for that. Probably not getting a lot of kids going up into the next tax bracket. If they are, that’s a good problem. It means they’re really good income, too.

Chrissy
That’s true. So we’ll move on to the next question. Can you tell us is there a way to structure your withdrawals so that the EAP gets withdrawn first and then the PSE? And is there any sort of tactic that parents can follow to, to maximize how much they can get out? That’s taxable under the child’s name, and then maybe leaves the PSE for later?

Kari
Yeah, as a parent, you decide what gets withdrawn when. So you can only withdraw $5,000 of the EAP within the first 13 weeks. But after that point, you can withdraw all the EAP until it’s used up and then focus on the PSE if that’s your strategy.

Chrissy
Okay, so so you could do that the government’s not going to say Hang on, you gotta take some PSE at the same time. You are allowed to take just EAP after the first 13 weeks, there’s there’s no limit, you can just take EAP only.

Kari
Yes, if that’s what you’d like to.

Chrissy
Okay.

Court
So has that $5,000 limit on the EAP, within the first 13 weeks, has that gotten in the way of you trying to structure your withdrawal strategy? Like, are you looking over a four year time horizon when you’re starting this out? Or are you just looking year over year and you’re saying, Okay, this first year, I can do $5,000 within 13 weeks using the EAP and the grants. And then after that, then we’re kind of going to come up with the next plan of action, or can How can you guide us through like the first year what your thoughts were knowing that you had that $5,000 limit on the EAP? Within the first 13 weeks? Did you just say, Okay, we’ll just use $5,000 from the EAP. And the rest will come from our contributions meaning the PSE for the year, or did you do what you needed to do within the first 13 weeks reaching that $5,000 limit on the end And then go after the EAP. again after those that 13 week timeframe has, you know, expired?

Kari
Yeah, I suppose we probably would have taken out a little bit more than $5,000 for EAP. In the fall of first year, if we could have, she’s living at home, so she doesn’t have any residents or rent expense. But they still tuition, which is not cheap. And textbooks are expensive and food and things like that, and public transit. So it did come out to more than $5,000 for the fall term. And if I’m remembering she actually had to pay her winter tuition before the end of the fall, so it probably had to cover the winter tuition as well without money. So, so yeah, it did change what we would have liked to do otherwise. But I mean, it’s not terribly over.

Court
Right. So once you get over that 13 week initiation, then you have the complete freedom to decide how you want to Withdraw, and you can take 100% EAP out for the next tuition if it’s due after 13 weeks or a year two or three, however you want to do it, depending on what makes sense from a tax perspective with your child, if they’re working that year or not, you kind of have to meld the two. Like, I feel like in theory, you just say, Okay, my EAP is x, I’m going to divide it by four and use that for all four years, the fourth, the fourth, the fourth, the fourth. But of course, then it depends on the income tax level that your child is in. And if they’re working any of those years, if you just take a fourth of the EAP plus their income, it may bump them up to a higher tax bracket. So you kind of have to meld the two of maximizing the gap payments to ensure that you get all the grants and you get all the income and not get hit with that 20% penalty. Whereas on the PSEs and your contributions, you wouldn’t you can just take that out tax free and clear since it was tax free money, but then you also need to just be cognizant of any earned income that your children are getting over the years. That you’re withdrawing. So that way that’s, it seems like that’s the best way to withdraw. But it’s obviously hard to think of that in year one, when you don’t know what their income is going to be in year two, three or four if they’re going to be working. So it seems like there’s no real way to structure it in the first year other than maximizing the EAP payments as best you can, and then taking it year by year.

Kari
Yeah, I think that’s right. And if you can anticipate anything like if you know, there’s a co op term coming up, you can try and plan around that. But otherwise, you’re just trying to do the best you can. But keep in mind also that the income still is growing during the period where they’re in school because hopefully you’re still earning interest in dividends and capital gains over this period.

Court
Right. And I think we all need to take a step back and just realize what a good situation this is, right? Like trying to figure out how to spend money, right like to, you know, minimize taxes and make sure our kids end up with the least amount of loans. possible. So I think it all just wraps up, you know, just the power of this account. And by dealing with the withdrawals and trying to figure out you know, how to withdraw the most tax efficient way, it puts you in a power, you know, a place of privilege, just that you’re able to even think about this right. And I think a big takeaway that we haven’t really talked about is like, your kids should be part of these conversations, right to understand, like, why they have X amount of loans versus what it could have been if you didn’t have an RESP in place, what it would look like for them, and then you can talk to them about compound interest. And if they had $50,000 in loans instead of five, how many years that would take for them to pay that off. And if they invest that instead, they can reach FI in 10 years instead of 20. Or, you know, whatever it may be, and I think using the RESP as a building block along the journey with your kids, even when they’re young to not just while you’re withdrawing. I think it’s just a really powerful account and you can use money lessons with your kid with it while the account’s growing.

Kari
And we keep saying four years, four years. Four years, but it’s not restricted to four years. So if your child is planning on doing postgraduate studies, or if they’re starting off in a college program and then transitioning into a university program after that, or vice versa, or maybe taking a couple years off, and then going back to do a master’s program or whatever, you can still use your RESP for all of that.

Court
Right, right. Very true.

Money Mechanic
Well, I don’t think I could wrap that up any better than the Court just did. And Kari as well, it does sound to me, like the withdrawal portion of this is can be complicated and is going to be absolutely one of those personal finance decisions. And I think you made a great comment there about sitting down with your University’s child and having this discussion as a family and perhaps if you need to with a financial coach or a fee for service advisor.

Kari
We should probably add it. You know, we’ve gotten really deep into the weeds of trying to maximize your contribution and maximize your grant and maximize your tax favorable withdrawals. But really, you’re just trying to do better than nothing. So it’s all sounding really complicated. Like, don’t let that stop you from taking out an RESP. So, go into your bank, if you don’t want to be a DIY investor, go into your bank and they will give you advice. And yes, you pay for that advice in terms of mutual fund higher fees, but it’s better to be doing that than doing nothing at all. So get in there and open an account and, and just get started. And it’s better to have enough down the road or have as much as you can manage them to have nothing at all.

Chrissy
That was a great thing that you mentioned there, Kari, cuz I think a lot of times we hyper optimize things in the FI community and we sometimes lose sight of what’s really important and you’re right. It’s important to just have do better than doing nothing. Having some some money is a great move in the right direction.

Kari
And our decision to move into GICs in the high school years, you know, sure we lost out on some capital gains during those years. But we locked in the gains that we had. And I knew that when the stock markets went down, if they went down and they have this year, that we wouldn’t lose what we had built up. Because, you know, if you get to age 65, or whatever your ideal retirement age is, and there’s a market crash, you could always work a bit longer or work part time, or, you know, put off buying a new car for a couple years or something like that. But you can’t really tell your 18 year olds Oh, sorry, honey, you can’t go to university or college for another five years until the stock market recovers.

Court
It’s important to recognize, like that point have enough, you know, like we have enough for four years of education, if that’s what you think your child’s going to do, or whatever it may be, you know, you want to have enough for six years of education if that’s, you know, what you want to rationalize I agree Kari once you’ve reached that point where your funds have grown, and you feel comfortable with that number, of course, tuition can change year over year, you know, there could be unforeseen expenses. But I think it’s that psychological balance of figuring out, do I want to continue to be aggressive and see my portfolio potentially grow another 10% over the next 5, 10 years, you know, however long it may be? Or do I want to be content knowing, okay, this is where basically, your child here is what you are going to have, choose wisely. Do what you want with this money. You know, I think it’s that emotional, psychological balance that parents and kids, you know, again, talk about it with your kids, you know, and figure out if they’re comfortable with that I think you ultimately have to say, as a parent, but just another talking point that you can have with your children is, you know, explaining why you’re doing things this way.

Money Mechanic
Mm hmm.

Chrissy
Absolutely.

Kari
Absolutely.

Chrissy
Yeah. I’m super aggressive. But I think both of you are sharing very wise advice. You have to go with your gut and what you’re most comfortable with and Of course, what your child is, is also agreeable to because that is their education money. So thank you for mentioning all of that. Those are all very important points that we need to share with our listeners. I think that we covered everything in a lot of detail. And I would love it if our listeners if they have any extra info could chime in, whether it’s on our Facebook page or in our comments in the show notes. We would love to learn more, where we’re all just doing our best here based on the information we have. But if anyone knows anything extra that we haven’t covered, please do. Let us know. We’d love to hear from you.

Money Mechanic
Yeah, be great if we can get some feedback from our listeners, because I know there’ll be questions out there and and I’ll probably have some of my own because I do have some young siblings or I guess my my sibling has young children that I should contribute to as well. And, wow, this has been a marathon recording session and I cannot thank Court for all the work that she did before this episode coming up with a lot of this questions and content For Kari coming on the show and allowing us to rapid fire questions at her, and for the time that you both committed today for Explore FI Canada, and I know all our listeners are really gonna appreciate this. So, Kari, thanks so much. It’s a pleasure talking with you.

Kari
It’s my pleasure.

Money Mechanic
Yeah, give us a quick plug where our listeners can find you.

Kari
You can find my blog moneyinyourtea.com. And I write about all kinds of investments and spending and savings and lately quite a bit about how COVID-19 is affecting family finances.

Money Mechanic
Fantastic. And you’re probably on some social media as well. They can probably find you on Twitter. I think I see you on there as well.

Kari
Yeah, that’s right.

Money Mechanic
And Court. Again, many thanks. And give us a little plug of where our listeners can find you.

Court
Yeah, sure thing I’m happy to be on. We blog over at modernfimily.com so it’s a spin on the TV show Modern Family but FI in there and since we reached FI for our family of three that’s pretty Primarily the best way to find us. I’m also on Instagram @ModernFImily. But I’ve done two social media detoxes this year so far for two months, and I am slowly creeping away from social media. So the best way for sure to find us is on our blog. Feel free to reach out we have a contact section or comments on one of our blog posts. You know, you can find us there.

Chrissy
And of course Court was a previous guest on two other episodes, and I will include the links in the show notes.

Court
Yeah, thanks.

Money Mechanic
Right on Chrissy. Well, this is a fantastic episode and we will catch you listeners on the next episode of Explore FI Canada.

Transcribed by Otter.ai

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4 Replies to “033: All About RESPs (Part 2) | Money in Your Tea and Modern FImily”

  1. Hi.
    Enjoyed this episode. Just wanted to point out something (especially in the scinerio where a teenage contributes their own money which was discussed at the beginning.
    There is a specific rule that applies to 16 and 17 year old children:

    Contribution requirements for beneficiaries who are 16 or 17 years old
    However, since the CESG has been designed to encourage long-term savings for post-secondary education, there are specific contribution requirements for beneficiaries who attain 16 or 17 years of age. RESPs for beneficiaries 16 and 17 years of age can only receive CESG if at least one of the following two conditions is met:

    a minimum of $2,000 was contributed to (and not withdrawn from) the RESP of the child before the end of the calendar year they turned 15
    a minimum annual contribution of $100 was made to (and not withdrawn from) the RESP in at least four of the years before the end of the calendar year the child turned 15
    This means that you must start to save in RESPs for your child before the end of the calendar year in which the beneficiary attains 15 years of age in order to be eligible for the CESG.

    1. Hi Jackie—this is very helpful information. We were not aware of these conditions. Thank you so much for taking the time to let us know. I’ll also post it to our Facebook page so that our followers there know about these rules.

  2. Loved this episode. The information shared and different scenarios visited were great. It was easy to understand and see how it applies to my personal situation. Love the details on withdrawal process of growth vs contribution. Thank you all for the time put into these two episodes,

    1. Hi Cara—what a lovely comment, thank you! Kari and Court did a fantastic job of covering everything in detail. They really made the show!

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