I’ve been wanting to do a post on RESPs for some time now but wasn’t sure how to approach this subject. I am in no way a financial expert. I’m only writing this post because of my own personal feelings, I guess negative feelings, towards RESPs. RESPs are for your child’s educational purposes. Provided by the government, they are a way to save for your child’s post-secondary education. A parent, grandparent, aunt, or uncle, for example, can contribute to an RESP in the child’s name. The government in Canada usually adds $200.00 for every $1,000.00 contributed. The funds are not taxed until they are withdrawn and can be used for school tuition, books, housing, transportation, or anything school related.
In theory, a good idea. In practice, frustrating as hell. At least it was for me.
Why I Dislike RESPs
With four kids, we tried to contribute a little bit at a time to our RESP for each of our children’s education. I really wish we hadn’t. Every time I wanted to withdraw my money from our bank to pay for my kids’ tuition and books, I was plied with a number of questions as to what this amount would be used for. I was asked for my receipts each time too. For me, keeping receipts is no big deal. I’m usually pretty organized that way, but having to provide them directly to the bank is ridiculous. If the government needs to see them, fine, since they are providing $200.00 to my every $1,000.00. As well at the beginning of each school year, I provided the bank with the information they required about the school institution that my child would be attending, such as the institution’s name, address, email address, phone number, courses they were taking, how long the course ran, etc. Then each and every time I went into withdraw funds I had to provide the same information over and over again. The reason, according to my bank, is they don’t store that information at their branch and the government requires that information each time. This was a big deal each time I went to the bank. Maybe it’s just my bank, but it became a very frustrating and redundant process!
One thing that we didn’t realize when we opened an RESP, and was never explained to us until we questioned a few things, was the fact that you couldn’t use that money for your child for anything else but education. So, if your child decides not to go to school, you have to pay that money back to the government, and depending what you chose to invest in in your RESP, you can be charged certain fees. For example, if you invest in stocks you will be charged fees to buy and sell stocks. Also, when money is withdrawn from your RESP, your child ends up paying the tax on it. As well, if you do not use up the grant portion of the RESP you must pay that portion back to the government once you discontinue the RESP. This was another thing no one explained to us until a few years later when I went to withdraw money from the RESP to pay for tuition for one of my kids. I was always told I had to withdraw a bit of principal and a bit of the grant given by the government. This was done so that my sons or daughter wouldn’t have to pay too much tax on the grant portion. It wasn’t until I met with one of the younger advisers that he told me to always take from the grant until it is gone, then withdraw from the principal. This way, if the grant is all used up, I won’t have to pay anything back to the government, and since my kids were working minimum wage jobs, their income was not high enough to pay any exhorbitant tax. The problem is different advice from different people within the same bank makes it very difficult to know what to do.
Other Alternatives to a RESP
We are immediately directed towards RESPs when we think of saving for our child’s education, but there are other alternatives that would probably allow bigger growth for your money. One thing my husband and I had always wished we had done was just to take our money and buy a small plot of land anywhere and sit on it. Selling it years later would probably yield more money than the interest we earned on the GIC we had within our RESP. Then, we would also be able to use the money for our children the way we see fit, not how the government dictates.
In reading a lot about RESPs, it’s hard to find any information other than different banks and lending institutions promoting RESPs, but I’ve learned that you could also set up an informal trust with your bank. You can contribute as much as you want to this trust – there is no limit and it can be used for other things other than education for your child. Segal LLP has a good online article on informal trusts.
In Canada, another avenue would be Tax Free Savings Accounts. You can withdraw your money at any time and not pay tax, and the money could be used as the parent sees fit to benefit their child.
Looking back over my last RESP statement, interest was paid at about 0.900%. Another way to save for your child’s education and earn more interest would be to open a high-interest eSavings account. This way you would earn more interest, you can withdraw when you like, and the money can be used for anything for your child, not just education.
I guess the best thing to do is start to put away money as early as possible for your child’s education and expect that your kids should contribute a small amount as well, especially if they are able to work part-time jobs while going to high school. My husband and I probably waited too long to start saving. As soon as you can afford to take a bit of money each month, try to start socking it away in some type of investment for your kid’s education. It makes a world of difference later on when that first tuition bill comes due. I’m not saying RESPs are bad – maybe just my experience was bad. Just know all you can about them before putting your hard-earned money into one. We didn’t know enough about them and found it frustrating to deal with the bank in what we viewed as our money. Learn as much as you can and read as much as you can about different investments before putting your money into anything.
Financial Books Links: