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April 21, 2019 | Baby Bucks

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Swimming in hormones, Jimmy opened the door to a knock. On the stoop was a trustworthy-looking guy with a briefcase. Twenty minutes later Jim and his wife owned not only a brand new baby, but an RESP. The wrong kind.

The baby vultures sometimes hang around maternity wards. They read the birth notices. They follow social media. They’ve even been known to spirit lists of new moms from hospitals. Their job is to mine the same overwhelming new-parent obligation that makes people load up on foolish amounts of life insurance when they give birth. They sell RESPs not as open-ended and flexible investment accounts, but rather as locked-in programs with fat initial payments, high fees and dubious outcomes.

So Jimmy fell for it. Don’t you.

A registered educational savings account is a good thing. It can provide a guaranteed 20% annual return. The government gives you money. Gains are tax-free. And after two decades it can finance junior’s tortuously-expensive journey through dental college. Got kids? Then you need an RESP.

Grace does, plus questions:

“In a recent blog post, you mentioned a family that had two kids and a family RESP, and that it was best to have that kind. Could you explain why? My husband and I have three kids and as they were born, we set them each up with an investment account RESP with ETFs and stocks.

“Also, I had until recently thought I would fund each to the maximum contribution amount, but am now thinking to only fund each up to the point of receiving the maximum $7,200 grant. That is, continue to contribute $2,500 per kid per year until they each max out their grant amount, then just oversee their accounts and keep reinvesting the dividends they receive in cash. I’d rather direct money to TFSAs and non-registered accounts to have flexibility in having/using those as needed, rather than have RESP rules dictate how those funds are used. The RESPs seem to be on the right track. 8 year old has $43k, 6 year old $30k and the baby (just started her account!) $3k+.”

Good points, Gracie. Maybe it’s time for a small recap of why an RESP is a cool thing – so long, of course, as you avoid any ‘providers’ whose plans come with an initial fee, poor investments or exit restrictions. The best RESP is a self-directed one which you open with your bank, credit union or financial advisor, then stuff with the appropriate assets.

The basic idea is simple: this is a savings plan for kids. All gains made within it are untaxed. You contribute on behalf of the little beneficiary, and the government will chip in an annual grant. There’s a lifetime limit on your per-child investment ($50,000) and an RESP can exist for as long as 35 years before it must be collapsed.

The grant is called a CESG, equal to 20% of the first $2,500 contributed annually to a max of $500, as Grace mentions. The lifetime grant total is $7,200 up to age 18 and unused portions can be carried forward one year. Of course, if you put in $50,000 all at once, you’ll miss a portion of the grant money, but the larger amount of principal will enjoy more investment growth.

By the way, an RESP does not need to be for your own child (or adopted). Grandkids, nieces, nephews or family friends also qualify – but they must be Canadian residents (not citizens) and have a SIN. Low-income families can also apply for a government bond payment worth $100 a year to age 15.

How does money come out?

With proof that they’ve enrolled in a post-secondary school, kids can take RESP funds out for education, pretty much tax-free. Original contributions are not taxed, and the grants and growth are considered taxable income in the hands of the student. Since most children don’t have employment income, taxes are nil.

However if a kid raids an RESP to buy a Camaro, the grant money is repayable, up to 20% of the withdrawal. And if the beneficiary throws her life away by becoming a rockstar and earning a billion annually, you can fold the growth portion of the RESP into your own RRSP, or take it as taxable cash after paying a 20% penalty.

However (and to Grace’s question) with a family plan the money can largely be moved to another child, for him/her to spend on schooling. Family plans can have multiple beneficiaries, all connected to you by blood or adoption. They’re flexible, since a portion of the overall pot can be attributed to children in differing amounts, accounting for their ages (more to the older ones with less time for growth). Family plans also cut down on account fees, since all of your brood can be covered by one.

Naturally, all RESPs should have growth-oriented assets in them, since the time horizon is usually a decade or two and school costs keep rising. Don’t make the mistake of thinking your precious, special spawn needs safe widdle GICs. You’ll come to regret that decision. Be wary of bank mutual funds with their insidiously-high MERs. And make a point of kicking any baby vulture off your doorstep, no matter how addled your brain might be.

Yes, puppies are so much easier.

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April 21st, 2019

Posted In: The Greater Fool

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