# RESP contributions ? Good or Bad ?



## davidjean (Mar 27, 2014)

Hey there, 

Please help, would love your advice. There is a great deal of societal pressure to contribute $$ towards my children's RESP. (3 children under the age of 7)

I'm tired of handing over my money to other people to invest. I'd rather keep and invest (or spend - family vacations - memories) the money that I earn.
What if my children don't drink the Kool-Aid (ie. go to school, get a good job, make a lot of money) and don't go directly to University or another qualified Post-Secondary institution?

Is anyone else struggling with the RESP contribution decision? Any good articles you could recommend.

Thank you.


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## leoc2 (Dec 28, 2010)

Did you find this old thread?

http://canadianmoneyforum.com/showthread.php/10649-RESP-How-much-is-enough


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## liquidfinance (Jan 28, 2011)

There are plenty of option even if your children decide not to go for the higher education. 

You can transfer into an RRSP if you have the room.
The money you pay in is yours so if you do decide to take the money out any penalty is only on the growth. 

Personally I opened a RESP with Questrade where I can invest in ETF's for free. This is ideal and allows easy reinvestment of dividends. 
I am only ever going to pay in enough to maximize the free government money and the account is primarily funded with the UCCB. Of course this funding method will need to be looked at once Trudeau decides on the replacement.


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## Potato (Apr 3, 2009)

Remember that RESPs aren't just for university education, a wide range of post-secondary options are eligible including many trades and college programs. Last time I looked up the stats, ~80% of kids will enroll in some kind of RESP-eligible program.

You can get self-directed RESPs, so you don't have to hand the money over to others to invest. And, you don't have to use your money for their education: your kids will have to enroll in something to make eligible withdrawals, but how the money is spent is up to you. So you can let them have the matching grants and growth on that, and keep the original principal and growth on that for yourself if you don't believe in paying for your kids' education.

And if they don't enroll in anything, as liquidfinance pointed out you can pay back the CESG and roll the money over to your RRSP.

As for struggling -- not at all. I don't know how much support I'll provide my daughter when she goes to shool, likely I will pay for some and have her find a job or take a loan to pay for some, but I'm certain I'll pay at least a bit, and getting the CESG match is a no-brainer for me. The big debate for me is whether to put in more than the CESG will match, as I do have non-registered investments (and even without the match the RESP will allow for tax-free compounding, with final taxation in her lower-income hands). So far I haven't, but I still debate it every January.


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## vi123 (Oct 29, 2015)

Potato said:


> As for struggling -- not at all. I don't know how much support I'll provide my daughter when she goes to shool, likely I will pay for some and have her find a job or take a loan to pay for some, but I'm certain I'll pay at least a bit, and getting the CESG match is a no-brainer for me. The big debate for me is whether to put in more than the CESG will match, as I do have non-registered investments (and even without the match the RESP will allow for tax-free compounding, with final taxation in her lower-income hands). So far I haven't, but I still debate it every January.


It depends on your expected rate of return and your marginal tax rate. The value of the tax-free compounding outweighs the cash value of the CESG that you will lose by 'over-contributing'.

For my own situation, the optimal strategy would be to contribute $44,000 initially to an RESP, then get the CESG for the next 3 years. 

If you have non-registered investments, its a no-brainer to:
1. Contribute the 'extra' money that will never get the CESG - that's $14,000 per kid.
2. Contribute extra cash beyond that, if you can. You might lose a few years of CESG, but the benefit of the tax-free growth will outweigh this. The exact amount that you should contribute depends on your expected return and your marginal tax rate.


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## tojo (Apr 20, 2009)

It's been good for me. I started one about 16 years ago for my kid contributing $2000 / year automatic deductions: 1/3 US Equity Index, 1/3 Global Equity Index and 1/3 Canadian balanced fund. The portfolio went through recessions of 2001 and 2008/9 and now worth about $70000 - decent returns but not great. Still, it will pay the better part of University. I've moved almost all of it now into an index bond fund to protect from a market downturn since funds will be needed in two year time. Automatic contributions make it a no brainer and takes advantage of dollar cost averaging.


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## FI40 (Apr 6, 2015)

vi123 said:


> It depends on your expected rate of return and your marginal tax rate. The value of the tax-free compounding outweighs the cash value of the CESG that you will lose by 'over-contributing'.
> 
> For my own situation, the optimal strategy would be to contribute $44,000 initially to an RESP, then get the CESG for the next 3 years.
> 
> ...


This seems like a good idea - so you are saying basically contribute the lifetime maximum to the RESP (I believe it is 50k per child), slowly claim the grants until they are maxed, then for the child's education their Educational Assistance Payments should deplete the non-contribution portion of the account. Then you can pull back out the 50k in contributions, tax free. I guess the "danger" is if your child does not use up all the non-contribution money on education, and you need to take out an Accumulated Income Payment - taxed at 20% penalty on top of your marginal tax rate.

The only thing I don't like about this idea is what if a future government messes with how RESPs are taxed or withdrawn? In general, I like money to be unregistered...I guess this is only a mild concern though.


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## Woz (Sep 5, 2013)

There doesn’t seem to be much of a benefit to over-contributing if your unregistered investments primarily result in capital gains. You get the tax-free compounding either way and you’re taxed at half your marginal rate instead of your child’s full rate.


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## vi123 (Oct 29, 2015)

FI40 said:


> This seems like a good idea - so you are saying basically contribute the lifetime maximum to the RESP (I believe it is 50k per child), slowly claim the grants until they are maxed, then for the child's education their Educational Assistance Payments should deplete the non-contribution portion of the account. Then you can pull back out the 50k in contributions, tax free. I guess the "danger" is if your child does not use up all the non-contribution money on education, and you need to take out an Accumulated Income Payment - taxed at 20% penalty on top of your marginal tax rate.
> 
> The only thing I don't like about this idea is what if a future government messes with how RESPs are taxed or withdrawn? In general, I like money to be unregistered...I guess this is only a mild concern though.


No you shouldn't contribute beyond $50k, or you will be penalized.

I'm saying that the optimal strategy for many will be:
- Make a large contribution upfront (probably around $40k for anyone in a higher tax bracket)
- Maximize the CESG for the next few years
- Then make no further contributions

The value of the compounded, tax-free growth on the upfront payment outweighs the value of the missed CESG grants.

So you might make these contributions:
Year 1: $40,000
Year 2: $2,500 (+ $500 CESG)
Year 3: $2,500 (+ $500 CESG)
Year 4: $2,500 (+ $500 CESG)
Year 5: $2,500 (+ $500 CESG)
Year 6 onwards: No contribution (and no CESG)


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## vi123 (Oct 29, 2015)

Woz said:


> There doesn’t seem to be much of a benefit to over-contributing if your unregistered investments primarily result in capital gains. You get the tax-free compounding either way and you’re taxed at half your marginal rate instead of your child’s full rate.


Absolutely. But if you have bonds or dividend-paying stocks in your taxable accounts, it probably makes sense to move them over.


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## FI40 (Apr 6, 2015)

vi123 said:


> No you shouldn't contribute beyond $50k, or you will be penalized.
> 
> I'm saying that the optimal strategy for many will be:
> - Make a large contribution upfront (probably around $40k for anyone in a higher tax bracket)
> ...


Ah ok, I didn't understand you at first. I thought you could contribute all the money first, then claim all the CESG grants in later years. I realize now that's not possible. So wow, you're actually foregoing CESG grants? Seems like a bold move, that's really interesting.

I did a little Excel sheet, and assuming I understand it correctly, your strategy did come out ahead of simply contributing 16500 in Year 1, then 2500 each year until maxed out (1000 in the last year to get from 7000 to 7200 in grants) for interest rates above 2%. So I was about to write back that this is awesome, I'm doing it, thanks! But then I realized I forgot to account for the opportunity cost...the difference (40,000 - 16,500 = 23,500) that is sitting in a taxable account earning the same rate of interest. Assuming you wait until the end to liquidate that, and pay 25% tax on it (that's a lot of tax if it's capital gains), the breakeven between the two strategies jumps to about 8.3%. So not worth it for me, as I only assume 6% returns from an index portfolio.

So yeah maybe it's better to contribute about 16500 first, since that still gives you enough space to max out all the rest of the grant room?


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## Sampson (Apr 3, 2009)

FI40 said:


> So yeah maybe it's better to contribute about 16500 first, since that still gives you enough space to max out all the rest of the grant room?


Our family came to the same conclusion.

Actually tax shelter for the benefit of tax shelter... for years now I have considered maxing out and RESP for myself and my wife also. In our early retirement plans, we could easily go back to school, take some art or drama classes or something and shelter $100k for 20 plus years.... still haven't done it yet, would love to hear if anyone else is doing this.


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## vi123 (Oct 29, 2015)

FI40 said:


> Ah ok, I didn't understand you at first. I thought you could contribute all the money first, then claim all the CESG grants in later years. I realize now that's not possible. So wow, you're actually foregoing CESG grants? Seems like a bold move, that's really interesting.
> 
> I did a little Excel sheet, and assuming I understand it correctly, your strategy did come out ahead of simply contributing 16500 in Year 1, then 2500 each year until maxed out (1000 in the last year to get from 7000 to 7200 in grants) for interest rates above 2%. So I was about to write back that this is awesome, I'm doing it, thanks! But then I realized I forgot to account for the opportunity cost...the difference (40,000 - 16,500 = 23,500) that is sitting in a taxable account earning the same rate of interest. Assuming you wait until the end to liquidate that, and pay 25% tax on it (that's a lot of tax if it's capital gains), the breakeven between the two strategies jumps to about 8.3%. So not worth it for me, as I only assume 6% returns from an index portfolio.
> 
> So yeah maybe it's better to contribute about 16500 first, since that still gives you enough space to max out all the rest of the grant room?


Are you including the tax on the distributions in the taxable account?


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## FI40 (Apr 6, 2015)

Did not include tax on distributions, just straight capital gains taxless accumulation and then liquidating it all in one shot at the end. This would skew the results a bit, since it's 1-2% of the 23500 over 18 years in dividends if it's an equity index. If it was bonds or something then it would be worse.

If I assume 2% distributions, 20% tax on dividends, then I come out with a breakeven rate of 6.6%.


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## FI40 (Apr 6, 2015)

Sampson said:


> Our family came to the same conclusion.
> 
> Actually tax shelter for the benefit of tax shelter... for years now I have considered maxing out and RESP for myself and my wife also. In our early retirement plans, we could easily go back to school, take some art or drama classes or something and shelter $100k for 20 plus years.... still haven't done it yet, would love to hear if anyone else is doing this.


Really cool idea! As a 30 year old planning to retire in about 5 years, and definitely open to doing a PhD in early retirement, I need to start thinking about this ASAP! I have until mid next year I guess before I turn 31 and lose the opportunity.


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## vi123 (Oct 29, 2015)

FI40 said:


> Did not include tax on distributions, just straight capital gains taxless accumulation and then liquidating it all in one shot at the end. This would skew the results a bit, since it's 1-2% of the 23500 over 18 years in dividends if it's an equity index. If it was bonds or something then it would be worse.
> 
> If I assume 2% distributions, 20% tax on dividends, then I come out with a breakeven rate of 6.6%.


If you're going to put relatively tax-efficient instruments in there, then the optimal years of contributions will change. Try it with a smaller upfront payment and say 8 years of contributions instead of 5. Most people will have some kind of optimal strategy depending on their tax rate, investment mix, expected return etc.


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## Sampson (Apr 3, 2009)

FI40 said:


> Really cool idea! As a 30 year old planning to retire in about 5 years, and definitely open to doing a PhD in early retirement, I need to start thinking about this ASAP! I have until mid next year I guess before I turn 31 and lose the opportunity.


That's not how I understand it. the 31st and 35th anniversaries of the plan are for wind-down purposes. Obviously no CESG available, but perfect for anyone with definitely plans for post-graduate education, and also, there are SOOO many eligible programs, than it should be worthwhile for any with investments sitting in unregistered accounts.

People could argue there is not a benefit for high-income earners - since withdrawals would be added to present income and could be taxed at higher rates than present, however I would counter that one simply needs to plan retirement income well, and draw from the plan in years where you have little/no income - early retirement, unpaid sabbatical etc.


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## FI40 (Apr 6, 2015)

vi123 said:


> If you're going to put relatively tax-efficient instruments in there, then the optimal years of contributions will change. Try it with a smaller upfront payment and say 8 years of contributions instead of 5. Most people will have some kind of optimal strategy depending on their tax rate, investment mix, expected return etc.


I see what you're getting at, yeah that makes sense. It seems crazy at first to leave money on the table like that, but I'm with you, it certainly can work for people who have taxable investments.

Prior to this morning I hadn't even considered front-loading contributions so I'm pretty happy to realize these options are there - thanks!


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## FI40 (Apr 6, 2015)

Sampson said:


> That's not how I understand it. the 31st and 35th anniversaries of the plan are for wind-down purposes. Obviously no CESG available, but perfect for anyone with definitely plans for post-graduate education, and also, there are SOOO many eligible programs, than it should be worthwhile for any with investments sitting in unregistered accounts.
> 
> People could argue there is not a benefit for high-income earners - since withdrawals would be added to present income and could be taxed at higher rates than present, however I would counter that one simply needs to plan retirement income well, and draw from the plan in years where you have little/no income - early retirement, unpaid sabbatical etc.


Looks like you're right. I was looking at family plans which have different rules. So it can be opened at any age.

Yes, and also I would add that the contributions are not taxed upon withdrawal, so it's not that the high income earner is exposing themselves to double taxation or anything, just the tax on the interest/cap gains/dividends. That is a much smaller amount that would be easy to use up for education. Also yeah, ER gives lots of opportunities for tax sheltering.


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## Taraz (Nov 24, 2013)

Don't forget that the kid has to pay income tax on the Educational Assistance Payments (EAPs) from the RESP. This may not matter much if your kid doesn't work, but I took a year off before going to school, so I would have made approx 30K in the first 8 months of my first year of school before any EAPs (however, my parents didn't have an RESP for me). A decent-paying part time job or small business for your kid/student could mean that the withdrawls are taxed at a fairly high rate. 

I wouldn't invest more than the CESG matching amount, except if your kid is not doing paid work and is going to be in school for many years. Then you can spread the EAPs out over several years to minimize the taxes.


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## CalgaryPotato (Mar 7, 2015)

Not a decision I struggled with at all. Free money, 20% (minimum) add on from the government is huge. Don't give it to other people to invest, use a self directed RESP.

Unless you've got your mind made up you aren't giving a single shiny nickel to your kids for post secondary I don't see why you wouldn't take advantage. And even if that is your decision you can still put their gift money into one.


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## CalgaryPotato (Mar 7, 2015)

Sampson said:


> Actually tax shelter for the benefit of tax shelter... for years now I have considered maxing out and RESP for myself and my wife also. In our early retirement plans, we could easily go back to school, take some art or drama classes or something and shelter $100k for 20 plus years.... still haven't done it yet, would love to hear if anyone else is doing this.


You can't create an RESP for anyone over the age of 16 or so. You can use your RRSP and take advantage of the life long learning plan.


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## FI40 (Apr 6, 2015)

CalgaryPotato said:


> You can't create an RESP for anyone over the age of 16 or so. You can use your RRSP and take advantage of the life long learning plan.


You can, you just don't get any CESG grants. It's a way to avoid paying tax on your investments if the proceeds will be used for education. I think it only makes sense if you have maxed out your RRSP and TFSA and have taxable investments or cash sitting around. Taking money out of the RRSP for education is counterproductive in this case.


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## Nerd Investor (Nov 3, 2015)

FI40 said:


> Really cool idea! As a 30 year old planning to retire in about 5 years, and definitely open to doing a PhD in early retirement, I need to start thinking about this ASAP! I have until mid next year I guess before I turn 31 and lose the opportunity.


If that's the plan, don't forget to look into the Life Long Learning Plan (borrow money from your RRSP to pay for school). I'll add, you probably don't want to do that if you have a boat load of non-reg money you can use instead though.


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## Tom Dl (Feb 15, 2011)

If you fall into a category where the student would get tuition subsidies, then those are clawed back from your RESP funding of your education. This is only normal, but if you find yourself at that end of the social spectrum you will not have realized much advantage from this investment strategy compared to some others.

If you can drop your income to a low enough level for the period in question, tuition may be free, which beats having to save for it. You can live off money in your accounts while the student is at college. Not worth planing for, but sometimes it happens anyway.


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