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  1. Another great post CC, thanks for doing the math and sharing the spreadsheet. You are becoming the TFSA guru!

  2. Interesting post.

    One of the items in the recent budget that is important for RESP accounts is the fact that you don’t have to collapse the account until it’s been around for 35 years vs 25 years currently. This gives a lot more parents who have kids not attending school the opportunity to collapse the RESP when they are retired which lowers the tax hit from the collapse.

    In this post I did a comparison of RESP vs non-registered account and concluded that if the child did not go to school and the parents were retired when they collapsed the RESP account then there was only a small disadvantage to the non-registered account. This disadvantage is more than made up by the fact that the RESP account ended up way ahead if the kid did go to school.

  3. One thing I’ll note about the StatsCan data – the 60% number you quote is a point-in-time number – it’s the number of 18-to-21 year-olds attending university or college at the time the survey was completed. There are plenty of 18- and 19-year olds that take a year or two after high school to “find themselves” before attending post-secondary education. A good chunk of the 40% not attending post-secondary schooling when the survey was completed will pursue higher education in some way within a few years afterward.

    How many people do you know that enter the job market nowadays with nothing more than a high school education – no trade school, no college, or university? There aren’t very many that I’ve seen, especially among middle- and high-income families.

  4. Canadian Capitalist

    Mike: The government can’t stop tinkering with RESPs, eh? Fortunately, all the changes so far have been improvements. I think the CESG is a huge advantage to RESPs and if chances are very high that kids will go to university, it is almost certain that a RESP will come out ahead of other options as long as there is a match.

    George: I agree with you. For families with well-educated parents and high incomes, it is a virtual certainty that kids will go for a higher education.

  5. It also depends on how much of your kids’ education you want to pay. There’s something to be said for them paying for a part of their education. More of the people I know whose parents paid the whole shot wasted a year or two compared to those who paid for at least part of their education.

  6. Canadian Capitalist

    TonyR: Good point. The flip side is that education is so expensive these days that it is a huge burden to graduate out of university with tens of thousands of dollars in debt. The nice thing about RESPs is that you can withdraw the contributions for personal use and use the earnings and CESG for education. That way, the parent can control how much of their kids’ education they want to finance.

  7. I will be encouraging my kids to participate in paying for their own education (without loans). That’s what I did, I worked through University, and picked a program with “coop” so that I could pay my own way through.

  8. Good points. I paid all of costs, including housing and needed student loans to do it. I’d argue with the student activists until I’m blue in the face that they still have it good. Would anyone here pass up a $20k investment that gave you a $10k payment (ie. starting career salary vs. McJob salary) in year 5 and continues at an increasing rate every year for the next 40 years? Would you borrow the money to do it? I maintain that my student loans were the best investment I ever made and will never be rivaled.

  9. I made myself curious so I punched some rough numbers into excel yielding a very rough IRR of 42% for my education, including loans and interest and high McJob salary estimates. Factoring lost income during school years, it dropped to 19% BUT I still have 2-3 decaded to collect the “dividends”. My point is ‘get an education’, hopefully without loans but don’t let the need for a loan stop you….
    My $.02

  10. Wow great post. I don’t have kids but when i do this is something to keep in mind. I’m not that familiar with all this tax stuff, *laughs* lucky i have blogs like this to learn from!

    Thanks again

  11. Sorry i just read MDJ and Tonys comment about paying for your child’s schooling. Personally i am going to make them pay for it themselves. Even though i have almost 60k in student loan debt it was a wonderful learning experience.

    That said, i do think that when they do graduate and get employed that i would then pay for half of it (I would not let them know this ahead of time) and then later i would like to be able to give them the other half to put down on their mortgage.

    Just thoughts

  12. Why assume that a child won’t get higher education? If they don’t, I’d feel that I failed in preparing the child for success in later life. In that context, the numerical analysis of using an RESP becomes almost irrelevant.

    An RESP can be a motivational tool. You show the child that you have faith that they’ll go to university and have been setting aside money to help cover the costs. That said, we contribute just enough to get the maximum CES grant.

  13. Handy and neat little spreadsheet CC (I especially like the fact you have taken into account the fact that only the income in an RESP is taxable when withdrawn, not the contributions, a fact that many people forget). Though I would add consideration of the RRSP possibility – i.e. Yes, put all the first $2500 into the RESP, then maximize the TFSA or your RRSP if you expect your tax rate to be lower in retirement than while contributing. As your spreadsheet can show, at a tax rate of 0%, which is where many if not most students would end up, the advantage of the RESP is 20% all along, exactly the amount of the CESG. Moral of the story, when the government offers you part of your money back, take it!

    People should note that your spreadsheet is correct only up to contributions of $2500 since the max CESG is only $500 at a rate of 20% of contribution.

  14. CC

    Keep in mind that the TFSA can be set up at any time (after you turn 18) and if you put $5000 per year and don’t have kids until you turn 25 and they don’t go to school until they turn 18 and you can put back the money you take out as the contribution room is revolving, the TFSA may be the better option.

    However, I would argue that anyone setting up their financial portfolio should include all three vehicles in their portfolio.

    The TFSA should be set up as soon as you turn 18 and can save, but aren’t in a high enough tax bracket to warrant the use of RRSPs.

    Your RRSP should be set up as soon as you have income levels which push you into higher tax brackets.

    Your RESPs should be set up as soon as baby one arrives.


  15. It is amazing how quick your child’s S.I.N. arrives in the mail with the online registeration. I think I had my son’s within 2 weeks of his birth.

  16. Is it possible to withdraw money from a RESP to pay the tuition for private elementary or high school? Or is it limited to post secondary alone?

    Cheers, Jordan

  17. Hey Jordan, I believe the purpose is for post-secondary but there is some leeway in there for a specified program:

    The student is enrolled full time in a qualifying educational program at a post-secondary educational institution (this includes students attending an institution and those enrolled in distance education courses, such as correspondence courses) or;
    The student has attained the age of 16 years and is enrolled part-time in a specified educational program.

    I very much doubt that they meant private school by this, but it wouldn’t hurt to give the CRA a call and ask if the age works out. Though I’m fairly certain that they will inform you the funds are intended for post-secondary education only.

  18. I just read a new Federal bill has passed to change RESPs to be tax deductible like RRSPs. I wonder if they allow a carry forward of existing contributions.

    Let’s hope the senate approves it.

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  22. Daniel Goertzen

    One advantage of the TFSA approach is that you can get tuition deduction carryover to the parent. Consider this [extreme] scenario:

    – Save for education in a TFSA
    – Child has no income.
    – For example’s sake, say all eduction expenses are deductable (tuition, books)
    – Since child has no deduction room, parent can get the whole deduction at MTR (say 40%).

    If I got all that straight (perhaps I didn’t) then TFSA could be better than RESP. Of course that situation is extreme, and the child will probably have some sort of income, and not all of the child’s expenditures will be deductable.


  23. Canadian Capitalist

    Daniel: The education expenses (tuition, education amount and textbook credit) are not tax deductible. You just get a tax credit which would result in a 15% reduction in taxes payable and hence is worth the same whether it is taxed in the parent’s hands or the child’s. The 20% grant provided to a RESP just makes it better than the TFSA for saving for a child’s education.

  24. CC, having said that, it still would be a good idea to consider using, not to replace but to supplement the RESP. Contribute the max to the RESP to get any CESG the government is offering and then put the rest in to the TFSA to ensure the minimum amount is taxed for the child when in school to allow the deductions to make taxes owed 0.00, and then transfer the rest to the parent.

    Though not quite as nice as Daniel had thought, it still is a decent strategy, and worth thinking about if you are making enough contributions to an RESP to put in more than the CESG match tops up.

  25. Canadian Capitalist

    Traciatim: I concur and that’s what I plan to do personally. Contribute enough to get the maximum match for a RESP and any thing over and above that goes into the TFSA. As an added bonus, the TFSA account offers flexibility rather than tied to a specific purpose.

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  28. One thing is worth noting, if you planning to play it REALLY SAFE and keep your child’s education money in GICs only (not investing into market), the choice of GICs that could be placed in RESP is rather limited and the interest rate is usually significantly lower. It seems that none of the high interest GICs like Achieva, ING Direct and such are eligible for RESP, only for TFSA.

    Here’s an example situation: ING’s 5-year GIC is 4%, while all the big RESP eligible banks offer only 2.2% that’s 1.8% difference. Doesn’t seem like that much, but that little 1.8% beats fully maxed out CESG in just 17 years. O_O

    So it seems that RESP isn’t always better than TFSA, even with fully maxed out CESG. The assumption was made that the growth rate for both TFSA and RESP will be the same, while in reality GIC RESP interest is at least 1.5% lower – enough to completely erase any advantage CESG provides.

  29. I’ve been looking around for a definitive answer to this question:

    We are getting the maximum CESG every year — Nice! But we heard from our friends that getting CESG would disqualify for student loan.

    Could somebody please comment to this?

    Thanks a lot!

  30. Is it worth it for low income family to contribute to RESP? As I know, in Ontario, if you apply for an Ontario Student Loan, and if your child cashed any RESP during the school year, the funding of her student loan will be reduced.

    At the moment, if the student’s income is low, which most likely is the case, any OSAP amount of loan she borrowed in a shool year that is over $7000, will be forgiven (she would be qualified for the Ontario student opportunity grant). That being said, if she borrowed $12,000, she only have to pay back $7000, and received $5000 OSOG to reduced the amount she owed.

    If the student cashed in $5000 of RESP in a school year, her OSAP funding will be deduced by $3361 (approximately), meaning she would receive $3361 less from the Ontario student opportunity grant offer by OSAP. The student could have received $5000 OSOG if she did not have the RESP.

    In my view, RESP is not really beneficial to low income families, because the OSAP funding will be affected by it, and it also reduced and jeopardizing the chance of receivng the OSOG.

    Can some one tell me if I am correct? If not, please explain to me why? Thank you so much.

    • Only EAP part is considered by OSAP. Assume you have $7200 CESG and all the interests, capital gain, the thing is you can cash out all of them within the first term. Then for the remaining term, you can use OSAP without considering RESP anymore.

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