Million Dollar Journey

Great summary FT.

StingyJoe
http://www.StingyFinance.com

CD,

What kind of portfolio do you have for the RESP? Stocks? Income?

FT

I don’t think you’d have to worry about having a huge amount of RRSP space since you’d only have to transfer the amount of growth. Don’t quote me on this, but why would the initial contribution that was taxed previously be subject to double taxation?

CAD$: I have no idea if you can start an RESP before you have a child. Even if you could, would you? Are there any “guarantees” that you’re going to have children at all?

Jeff: Good point. It would make sense that they only tax the growth portion of the RESP. However, even so, if you don’t have the RRSP room, they will charge the 20% penalty + income taxes + CESG payback.

Traciatim: That is an excellent point. Make your kids fully aware of the financial penalties involved with not going to school.

FT

A question I’m asking on my blog today: is it better to setup one RESP account for two children (which means waiting to contribute until you have a second child). I give more details in the blog, but basically this was recommended by a financial adviser!

FT,

Sorry it took a while to get back to your question.

Our RESP is through RBC and it a family plan (yes you can set one up with a child). Currently I have everything going into the RBC Dividend Fund. It’s got a good return since I’ve been in it, so I’m happy. I’ll change over to some more stable investments as the little one grows up.

In regard to the comment about starting a RESP prior to kids. No you can’t, but you could start saving in a taxable account and then after the kid is born move the cash over to the RESP to max out the growth of the account in the first year.

CD

Hi George! You make some excellent points. I wonder what the stats for post secondary education attendance for children who grew up in a home with education as a high priority.

George, so if the child/children do NOT attend University, you only have to pay back your GROWTH + 20% correct? The principle won’t get taxed twice?

FT

Another informative comment George. Thank you for taking the time to clear a few things up.

FT

Bob, it’s true that you don’t have to return the interest that was earned on the grant money, but it’s fully taxable as income when you withdraw it, plus there is a 20% additional tax.

It’s still a good deal, IMHO, because the 20-plus years of compound growth should easily compensate for the 20% extra tax you’d have to pay.

As noted above, the chances of somebody not pursuing some form of post-secondary education are pretty slim. It’s hard to get any sort of career with nothing but a high school education.

The government doesn’t really care where the money is going, but there is a limit of $5000 that can be paid to a beneficiary once they qualify to receive an EAP (Educational Assistance Payment), but after the student has been enrolled for at least 13 weeks, there is no limit to the amount that can be paid to the student as an EAP.

The EAP money is intended to be used for all expenses related to schooling, not just tuition. It can (and is intended to) be used for books, housing, and other living expenses while in school.

The EAP includes the growth within the RESP along with the government grant money, and counts as income for the student in the year it’s paid to him/her.

More info is here:

http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-e.html#P221_13631

I’m a little late to the discussion but I just set up my resp last week.
Lot’s of good info in these comments - 3 comments/ideas I’d like to add:

1 - The grants are given from the government to the student and you (the subscriber) are really only holding them in trust (so to speak) so if the kid doesn’t go to school you really haven’t lost anything when the grants disappear.
2 - The 20% tax on the growth on top of the income tax certainly sucks but as I’ve told a couple of friends, if you contribute a sum of $$ to someone’s education fund then how much of that $$ are you expecting back? Of course you wouldn’t be expecting anything because it’s for the education. So if they don’t go to school and you end up getting your contributions plus part of the growth back then you’re a lot further ahead financially than if they go to school. How to deal with the unemployed offspring who won’t move out of your basement is another story… :)
3 - As George mentioned there is a limit on the withdrawals in the first 13 weeks but after that you can clean out the account so even if your kid doesn’t want to go to school then one option is to convince him/her to attend long enough to get the money out of the account. Doing this would make the withdrawal taxable in the hands of the “student” so splitting it over the year end would help increase the net amount. Depending on your tax situation it might be better for the subscriber to just collapse the plan and pay the taxes themself. I’m hoping to be retired when my son is around 22 so even if he doesn’t go to school I can keep the plan open for a few years (you can keep it open until age 25) and then collapse it in a year when I don’t have any other income. This would reduce the income tax on the the growth (but not the 20% tax) Another thing to think about is that since you can contribute the AIP (growth) to your rrsp and completely avoid (not just defer) the 20% tax and if you don’t normally have any rsp room then you could potentially start creating some by undercontributing to your rsp a few years before the child heads off to school - I’m thinking that if a kid decides not to go school you might get some warnings signs a few years in advance.

Anyways, sorry for the lengthy post but my conclusion is that you can’t lose with this plan!

Some people don’t do RESP just because they want to get OSAP which may only need to pay back in half.

Does having more assets (ie resp) mean that osap is harder to get?

I’m with GEORGE on this one. I graduated from University in 2003 my wife in 2002, and she was stuck with $40k in student loan debt. We were fortunate to have decent paying jobs, good saving habits, and half financial sense to pay them off ASAP. My point is, student loans are not fun.

A question about the timing of events in an RESP. Our first child is due May 15. Does this mean that I have until Dec 31 to contribute the $2000 to get the full CESG, or does it go based on the child’s birthday? And how does the CESG get paid? If I contribute monthly, does a percentage of the CESG get deposited at the same time, or do I wait till the end of the year?

Jack: Mike’s got it right regarding the grant room, and I can answer your second question - the CESG is deposited at the end of each calendar month.

I contribute to my child’s RESP every payday every two weeks, and at the end of the month there are CESG deposits equating to 20% of my contributions. If I contribute $100 twice in a month, there will be two separate deposits on the last day of the month for $20. This continues through the year until the maximum grant has been deposited ($400).

For the moment I’ve got the money invested in an asset allocation fund (RBC Target 2020 Education Fund), but I’ll likely switch the money to an index-fund based “couch potato portfolio” once there’s around $10k in the account.

I was under the impression that the CESG did not carry forward?

And we’re having a boy!

As an agent with a leading RESP company I am always astounded by the lack of information the general public has regarding RESP,s. It is evident that few people investigate all options open to them. Banks, insurance companies, mutual funds companies, finacial planners as well as RESP companies all offer RESP,s. There are significant differences in these companies plans. The main differences are the actual investment vehicles being used, the payout options, fee structures as well as a refund of fees. It is interesting to note that people will go from dealership to dealership to dealership when shopping for a car, then turn around and take RESP advice from a neighbor. Or open an RESP at the bank they deal with simply because they have other investments there. They are told it is “convienent”. You are talking about a long term investment to benefit your children. My advice is to do your homework and shop around.

Glenn - good advice. Traciatim, I’m glad to hear that you made the effort to learn more about investments and put your plan in action. As far as your daughter’s resp goes, don’t blame yourself for not being an experienced diyer when you set it up. My opinion is that any kind of savings will take you most of the way to where you want to go. How you specifically invest that savings (ie rrsp, non-rrsp, debt etc) is a much smaller piece of the equation so in your case you still did a very good thing in setting up the resp and putting money into it.

A comment on both of your posts - I think the problem that people have with RESPs is that most people know nothing about them until they have a kid (why would they?) and then they panic because they want to get the thing set up as quickly as possible. It’s easy to say that they should take the time to do the research but that might not be that practical when you have a screaming baby with a diaper that needs changing :)

Glenn writes: “Outside an RESP company there is no full disclosure requirerments unless you ask for specifics.”

Huh? Full disclosure is required of the vast majority of investment products - stocks, bonds, mutual funds - they all have legal disclosure requirements. In any event, just because an RESP company discloses everything, doesn’t mean that their product is better than the competition.

You mention that banks have so many fees, that there are “too many to list”. This sounds like you don’t know what the fees are, or you’re just repeating a line that you read in your company’s training manual.

In any event, my RESP (through my bank) has no fees outside of the MER.

Glenn also writes: “An up front fee is in the best interest of the client.”

In that case, I have some excellent swampland to sell you. Send me my fee up-front, and I’ll be happy to tell you about it.

To me, an RESP company is only advantageous to somebody who lacks the discipline to save of their own accord. I know that I have no need for such outside encouragement, and I like the idea of choosing the investment products that suit me best. Others might find the hand-holding that an RESP company provides to be helpful, but I’m definitely not one of them.

Glenn, it really sounds like you’ve been heavily brainwashed into thinking that your company’s product is the be-all and end-all of education savings. Thank-you for at least having the decency not to post a plug for the company in your comments.

Glenn, that’s pretty interesting. As George had already mentioned the only fees that I will also have is the MER of my funds too.

Here is some more food for thought. I started the plan for my daughter through CST almost exactly 60 months ago. I put $105.00 a month (as much as I could afford at the time). That means that I’ve put in $6300, and the government would have matched 20% to bring it to $7560. That’s a simple calculation with no interest or anything else.

My CST plan, however, is only worth $7150. On the statement from their website this also includes $462.76 of interest income. Even with interest I haven’t even caught up to my fees and I’m 5 years in. Good thing they are looking out for my best interest. Also consider this, if I put in 1260 a year and have made only 462 in interest, with no government match that means I’m earning something like 2.4% interest. It’s even lower if you include the interest that should have been on the government matched portion too.

Then take my son’s RESP that is set up with low fee ETF’s. I only opened it recently and have made a $1000 initial deposit (since I started late and need to catch up to my daughters plan so I contribute the same amount; who need the ‘they love you more cause they contribute more to yours’). I also have put in 4 $105 payments for a total of $1420, add on the 20% that that government throws in and you get $1704. Fancy that . . . my plan is worth just about $1710, even with the recent market corrections.

Realistically only time will tell if one does better than the other, but until proven wrong I wish I could shout it from the hilltops to stay away from RESP companies.

I had to look this up - it appears you can open up other RESP accounts if desired.

4(a) How many plans can be established for one beneficiary?
There are no limits on the number of plans a subscriber can establish for a beneficiary, or the number of RESPs a beneficiary may have. However, the annual and lifetime contribution limits are per beneficiary, and cannot be circumvented by establishing multiple plans for the same beneficiary.

http://www.cra-arc.gc.ca/tax/registered/resp/faq-e.html

To Mike: I could theoretically start an additional plan to ‘top up’ my daughters plan with CST. However I want to keep my contributions even between my two children to avoid situations when they are older where one received more directly from me than the other. I’m already pushing just about the limit of where my budget will allow putting aside $210 all together for both my children, and the final word is that both of them will be better off than I was when I went to school.

Sorry, They are actually index funds and not ETF’s like I previously mentioned. I was in a rush on my way to work and messed up my terminology. I use a mixture of Canadian, US, and International indexes as well as a small (10%) in bonds. My plan is when my son turns 10 to start each year moving more and more in to safer investments as he grows to 18/19 years it will mostly all be nestled nicely in about a 30-70 mix of equity and safer investments. The funds I use have no entry/exit fees save an early redemption fee. Their MERs range from about 0.3 - 0.5% depending on the fund. The CESG also just gets deposited in the funds at when it comes in each month.

To Glenn: I’m curious to know what company you do represent so that I could read and compare to my current plans. You should e-mail it over to my gmail account: traciatim at gmail.com

Glenn: you know more about the managed RESP plans than I do so correct me if my info is not correct. It seems to me that if someone who wanted to start an resp and was extremely risk averse and didn’t want a lot of hassle setting up an online account and picking their own investments would be best served by doing the following:

Go to their local bank, set up an resp account (even with $50/yr fees) and buying GICs with the contributions.

From what I understand from Traciatim, the upfront fees of $2100 will ensure that the managed resp balance will never catch up to the self-directed resp balance assuming both portfolios are in similar fixed income products. I realize you get the $2100 back 18 years later but inflation would have an impact over that time period. The other drawback of the managed resp is that I think if the child doesn’t go to school then the subscriber only gets the contributions back and none of the earnings? (is this correct?). If true then that would be another reason to do the self-directed RESP.

I guess what I’m asking is what are some of the benefits of the managed resp over the self-directed that would make up for the deficiencies I’ve mentioned?

Traciatim - I just spent a few minutes perusing the CST prospectus and realized as you say that you can’t change the contribution schedule. What a rip, what happens if someone loses their job or has some other financial hardship? Doesn’t seem fair to me.
Another thing I saw in the prospectus (since you had mentioned poor returns) was that the returns they stated were quite good considering they are all fixed income investments. The numbers they had were 1 year return - 6.7% and 3 yr return - 7.4%. Then I noticed the small print which stated that these were gross returns instead of net of expenses. Pretty shady if you ask me. Further along the document I found the expenses which are applied to the fund as well as the fund size and it appears that the MER is around 5% or so which explains the difference between the 7.4% gross they claim for three years and the 2.4% return that you mentioned you got. Terrible stuff.
I’ll have to think about this some more but I suspect you are right in that you might be better off just staying with the plan - however I’ll let you know if I come up with a different opinion (for what it’s worth).

Re: CST - are their any loopholes or legitimate exits along the way that you could take in order to back out and switch to another plan with minimal loss?

If you were 14 years in, thats one thing, but after a few years in, perhaps it it would be worthwhile. Even if it costs you a few hundred $, it seems as though the peace of mind and flexibility it will bring you will be worth more.

Mike’s problem highlights the difficulties inherent in the RESPs offered by “Education Savings” companies - you get relatively low rates of return coupled with absolutely no flexibility regarding contributions. Sure, the plan will pay out when it matures, but you’re forced to follow a set contribution schedule and other restrictions.

With a self-directed RESP (such as is available at any of the major banks), you can put your money into whatever investment vehicle you choose, contribute as much or as little as you would like, and you can stop making contributions at any point if you need to, such as in the event of a job loss or other major financial setback.

FT: The only fees involved in mine is the MER for the mutual fund I’m invested in (RBC Target 2020 Education Fund). There are no transaction fees or other fees involved.

My daughter is now 2, and we opened the RESP as soon as we could.

To show you how quickly the money can grow, the balance of the account is now around $6700. This is comprised of $4950 of our contributions, $840 of CESG deposits, and the $500 Alberta Centennial Education savings grant, and about $410 of growth since the plan started.

I have set up a RESP account for my boys with TD eFunds. They are 18 mo. old, so for now the account is heavily tilted to equities. As they get older and are 5-8 years away from University, I would slowly move the portfolio to bonds / GICs maturing when we need the cash. To date, I haven’t paid a penny in fees apart from the low MERs. I chose a low-cost, self-directed RESP over group RESPs because of the flexibility and control it gives me.

There is a name for those group/pool plans (an Italian phrase I think after some investor) that takes one member’s proceeds to the benefit of the rest of the group when the member defaults, drops out etc. Anyone know the phrase?

It wasn’t Ponzi. If I come across it again I will post.

Haha…that’s pretty good Xing. I’ve never heard of Tontine but that’s an interesting scheme.

I guess the group plans do have an element of the Tontine but fortunately they don’t wait until there is only one student left - otherwise the kid might not go to school until they are 85!

Ken was it a group plan you are in? or a family plan? There’s a big difference.

Also - the contribution room started in 1998 not 1996 so don’t overcontribute.

Jack: The reason why Cestnick sugguests to maximize the contribution in the early years is to take advantage of compounding over time. You need to work out how much you think your children will need when the time comes. If it were me, I would contribute enough to maximize my CESG’s, and use the remainder on other areas like paying down the mortgage, RRSP, or a non-reg port.

Thanks, that’s what I was thinking as well.

I should have mentioned that in my example I compared contributing $36k in the first year to contributing $2k/yr for 18 years to maximize the grants.
There probably is some optimum method of contribution which would get more grants ie spread the contributions over the first 5 years in a declining amount but I don’t think it’s worth the effort to figure out since I can’t even do $2k/yr at the moment!

Haha, my thoughts exactly George.

Xing: the only information I could find is that a family plan has to be collapsed in its 26th year, but that doesn’t mean that the second child couldn’t use the funds - you could always withdraw as much as possible (beyond what is needed) while the first child is in school, and keep the money in a separate account to be used for the second child if they go to school at a later point. The only limit is that the first child can only get $7200 of the CESG money.

Personally, I think it’d make more sense to allow RESPs to stay open for 30 years, so that parents with children more spread apart could open family plans to include all of the children.

It’d probably be a better idea, if the children are spaced apart more than a few years, to open an individual RESP for the younger child. That way it’s a separate account, with its own “closing” date.

I found this site to have a lot of interesting comments and some other comments about RESP that apear not to be all truthful. Three things any person need to know about RESP when they open ne for their child is. 1. How much can i contibute over a lifetime. 2. How much per year do i need to contribute to get the max contribution from the government and 3. What is the potential return on that RESP. Regardless of what fees you pay people need to compare fees including MER over the life of their RESP. Also people should be aware that alot of RESP info is geared towards 21 Years. Most children will be eligable to start post secondary Education at 18 YOA. So if someone is providing you with a potential return for 21 Years you need to find out what it will be for 17 to 18 Years.

Just a comment regarding Comment No. 81: While I don’t disagree with anything said there, the “George” who made that comment isn’t the same “George” who made the rest of the comments that appear above it.

I thought that the answers to the “three things” were pretty clear: 1) the lifetime maximum contribution is $42,000 (soon to be $50,000 in the new budget), 2) To maximize the government grant money, you need to contribute at least $2000 each year ($2500 under the new budget), and 3)The total fees and return will depend on what type of investment the RESP money is placed in. Nobody can tell you what those returns will be with any sort of accuracy, unless the money is invested in extremely low-return investments.

As far as the number of years for compounding goes, 21 years is a reasonable number. Yes, many children will start post-secondary education at age 17 or 18. But they won’t finish until they are in their 20s, and the RESP can stay open (and compounding) for 25 years. You don’t need to withdraw all the money as soon as the child starts their education.

Hello again:
This is more of an interesting site than i taught. True the financial instutions offer flexability when you cannot deposit but keep in mind that 2 % MER over 18 years at a deposit 1200 a year works out to be about per month is a s

Well I once again would like to comment on Glenn #38 , #41 and any others they he wrote. Also Comment on George’s. I would first have to agree with Glenn and that RESP companies are the best. For example you can check this info. If i went to a bank tomorrow and put in $4000 a year for my child and did that for 10.5 year. I would reach the max. (Yes i realized that the amounts will be changing due to new budget). That same bank in their info is saying that i will have a potential return of 90K or so. If i did the same with an RESP company my potential return would be 197K or so. Lets for get the fees and bear in mind that the companies are for the most part no profit (meaning they have no shareholders like bank to pay) The companies do invest in low risk and so they should as the money is for a child. High risk is also good but you must be prepared to pay the piper when things go wrong. Just ask the income trust people. Having said that, lets just say that the government bonds, utility companies that the RESP companies invest in don’t provide a return as expected and they had a 4 K screw up on my RESP. Do the math, I still have 160K while my friend at the bank has 93K, he hopes. Also keep in mind that if utility companies don’t make money then neither do banks at least not for their customers but any that is made is for their shareholders.
All in all if George is happy with having his hard earned dollars at the Bank then that is fine. My whole point of this is that some people get fooled when a lot more options are available.

George2: I have done the math. Yes, it’s true that the RESP companies invest in low risk investments, but that hardly is an advantage. There’s nothing preventing you from opening an RESP account at a bank and investing the money in GICs and other low-risk, low-return investments. You also gain the flexibility of determining for yourself how much your contributions should be, and you can change that amount at any time.

I prefer to keep my money in moderate-risk, moderate-return investments; I’ll switch to low risk once my child is in junior high. Once I’ve got about 10k in the RESP account, I’ll be switching the funds over to a “couch potato portfolio” of index funds. Such a portfolio has averaged a return of around 12.5% over the past 30 years, and that’s not including any government grant money. The $7000 that I have in my RESP right now (with no further contributions) will grow to over $50,000 by the time my daughter is 19, assuming an average growth rate of 12.5%.
That same money, invested in an RESP company’s “safe” investments, growing at 6%, will be worth about $18,000.

Obviously all of the above numbers are hypothetical. The real return will vary based on market conditions and, in the case of an RESP company, your personal finances (for example, if something happens that forces you to stop contributing to the RESP).

I’m thinking something like this, though this doesn’t factor in compounding issues (i.e. an even bigger lump sum at the beginning)

Year Age Contribution CESG
2006 0 $4,000 $400
2007 1 $14,500 $500
2008 2 $2,500 $500
2009 3 $2,500 $500
2010 4 $2,500 $500
2011 5 $2,500 $500
2012 6 $2,500 $500
2013 7 $2,500 $500
2014 8 $2,500 $500
2015 9 $2,500 $500
2016 10 $2,500 $500
2017 11 $2,500 $500
2018 12 $2,500 $500
2019 13 $2,500 $500
2020 14 $1,500 $300
2021 15 $- $-
2022 16 $- $-
2023 17 $- $-
2024 18 $- $-
$50,000 $7,200

And without any proof, I suspect that the trusts (like CST) will have lower returns in the future as parents are less likely to stop the plan… and those who enroll now likely have a higher percentage of kids will will actually attend school.

I used to be a sales rep for an RESP compnay.Here are my concerns with the Group or pooled plans.They invest primarily in bonds and some companies are investing in Index Linked notes to give the equity exposure.If a Canadian Gov’t Canada 10 year Bond pays 4.42% how can they expect to grow your plan at 6% as they use in the pronmotional materal? Also, pick a number you think inflation will be over the next 10 years and deduct that from the 4.42% paid on the bond and that’s your real return.Can you put your child through school on a 2% or so return after inflation?
Group plans pay out an EAP or Education Assisted Payment based on the number of units you purchased.CST,only a few years ago paid $710 per year for each of their 4 annual Education Assisted Payout’s, now it is $600.That is a considerable drop in what you “hypotherically” will receive.This is to me an indication that they expect returns to get smaller not larger in future years. Additionally,they changed the payout before they gave their reps the proper software to update laptop presentations and their website.In other words, Reps were showing potential clients “illustrated values” that weren’t current.It also took their Web Site a long time to catch up, but is now current.
The plans like to say your Principal is guaranteed , but the prospectus will probably now say it is “protected”.Ask who “guarantees” your principal, how can the non profit foundation provide a “guarantee”?As they now trade Bonds rather than hold them to maturity there is a risk of them losing money.
Fees-these Group Plans are, to use mutual fund language , like a front end load fund.If make a single contribution of 1 unit for a child under 1 year old, it costs you $829-go to their website and use their calcutor.You will pay the $200 enrolment fee on this purchase which means 24%of your money isnt working from day 1.That is a hefty front end load.Ask the rep to show you the value of that $200 at 6% per year over the life of the plan ,and not just the 17 years you invested but also the additional 4 years years before you get all the fees returned to you.
However, those of you you investing in mutual funds should also ask your rep to tell you what you will in fees over the length of the investment.A plan that grows to $50,00 with a MER of 2.5% is costing you $1250 per year in fees.
If you want the safety of low risk investments like the Group Plans offer, then ask the Group Plan rep the difference between their plan and a no load bond fund.Again No Load doesn’t mean no fees.
Those posters who are counting on equities to provide double digit returns based on historical returns need to give their heads a shake.Look at the returns in 2001 and 2002, imagine you had $50,000 in the RESP and in those 2 years you lost over 25%, and your child is 5 years away from needing the money. As a parent who once had this belief and saw his kid’s portolio drop by over 25% over a few years, with the guidance of a full service broker,I can advise you that you must understand that equities are risky, and you won’t have enough time to get that money back and you won’t like the feeling.
I could go on, but will wait to see if there is interest in this post before doing so.