All About RESPs (Registered Education Savings Plans)

Kalee Boisvert: 00:00:15

Welcome to the wealth and wellness podcast with me Kaylie Bob air, I specialize in helping people to achieve their financial goals. I have a love for all things numbers, and I'm passionate about financial literacy. My goal is to spark healthy and positive conversations around wealth and investment, and create a world where nobody is limited by their financial situation. But wealth is just one piece of the equation of living our best lives. So join me as we explore both wealth and wellness topics. From your net worth to your self worth. Get ready to take confident action. Hello, this is Kaylee. And thank you so much for tuning into this episode, I realized that I have now been doing the podcast for just over a year, it sort of snuck up on me. So I just wanted to say if you are enjoying the podcast, please do share it. Tell your friends family members about it, it does make a difference. And I really appreciate that you can like on any of the podcast apps that you listen to subscribe, rate and review all that does make a big difference. And I do really appreciate it. And so I just want to say thank you to listeners, thank you for your ongoing support. And for today's episode specifically, since September is back to school month across Canada, I thought it would be great to have a topic on that theme. So I want to be talking all about our SPS today, which are registered education savings plans. And again, these are very much applicable here in Canada, the US it is a little bit different. They have their own version of them. So today, again, it's for the Canadian audience that I'll be talking about these plans specifically. So just to start, as you know, most of us are aware, student loans are a major source of debt for people across Canada. And so saving for children's education through an RSP is a great way to support your child to pursue education after high school, while not having to take on necessarily, you know, that debt burden, or maybe they are going to have to take on some but it's a lot more minimal with the help of their registered Education Savings Plan. So, again, it's really giving your child a great start for entering their adult years by having a plan in place having some savings towards their post secondary education. So first, as with any financial endeavor, I always suggest you start off with a goal. So when we talk about saving for your children's education, it start with just saying, you know, what does that mean to me? How do I want to help them so have a plan in place first, and again, there's no right or wrong answer, you can really do anything. And frankly, you don't have to save anything at all for them. I paid for my entire undergraduate degree myself. So I didn't have an RSP plan to help me out. And I was able to pay for it again, it worked, I saved I paid for it. I didn't take on any debt. But like I said at the beginning, this is a great way to help your children to contribute. So again, it's not a parent's obligation to do this savings. But it is a very, you know, great help and assistance for your children to do this. So again, start with the plan, first have a goal in mind, what is that goal? So is it that you want to be able to pay your child's tuition costs in full, maybe it's something like you want to cover their first year just or maybe you want to cover the first half. So maybe it's their first two years or three years, maybe the goal is you have a specific dollar amount. So maybe you say I want to contribute, you know, 20,000 to their education costs. And that's my contribution and the rest will have to be up to them. Maybe it's that you want to cover their full degree program, and you want to help pay for their cost of living. So maybe if it's that they're going to be at school, at another institution in another city or town that you're also willing to help support them for their costs of rent and cost of living. Maybe you want to help even with a post grad. So again, it there's no right or wrong answer. But just start out with just knowing what that goal is for you. Because by doing that you can really back out then well what do you have to do on a recurring basis to get there what needs to happen to achieve that goal and I'm all about achieving goals. So let's make it starting with actually a goal of what you want to achieve with us.

Kalee Boisvert: 00:04:47

So that's what I wanted to say just to start off here today. Okay. Now the question of course is okay, I want to help pay for my children's education. So how can I save and what we're talking about? Today, and really the best way I think that someone can save is through an RSP account, a registered Education Savings Plan. Again, we love our jargon in short forms. These plans or accounts, sometimes we call it plan, sometimes account, same thing. They are available at essentially all financial institutions. So they're quite flexible. If you bank with Royal Bank, for instance, you should be able to open an RRSP account there as well, to save your children's education. If you do direct investing, you can open it through a direct investing platform, if you work with an advisor across like, over different platforms, at a wealth management firm, for instance, they would be open able to open one as well for you there. So again, they are widely available, they're not only at certain institutions, or anything like that. So very easily accessible, they're flexible. do be aware, there are some different versions of these in the form of like scholarship trusts and pooled funds and group rsps. And so these ones are much less flexible. So just be aware of those. They're usually provided by other organizations, not the bank owned firms, for instance. So I would just have you, you know, remind you to keep an eye out for those ones. Again, just they're not as flexible. There are different rules and considerations. And those aren't the versions I'm talking about today. So I'm talking about just the RSP registered Education Savings Plan. So you might be asking, you know, why use though an RSP? What are some of the benefits? Why would I have this account in the first place? Well, one benefit would be the government grant portion. So the government is going to match a portion of your contributions. And what they do is they match your contribution at 20%. Now, there's some caveats to that. And we'll go through that in in sort of further to come in this conversation. But just to start off, we'll say, okay, you're getting a government grant matching portion, that's a benefit, tax free growth while in the plan and saving. So as you're putting this money away, it is growing tax free. And of course, it would have to invest it to be doing so. So as it's earning dividends.

Kalee Boisvert: 00:07:19

Sorry, capital gains interest as it's earning that you don't have to report it for tax purposes, if it's within an RRSP account, so you can invest and all that growth is sheltered. Another benefit is education, assistance payments. So these are aaps. And I'm going to talk more about these as well to come. But this is a form of how you can take out money from the RRSP when your child's in school, and it's taxable in the hands of your the student. So that's beneficial, because if it's taxable in their hands, they're likely in a lower tax bracket than you are because you know, when they're in their first year or second year, they're probably making a lot less money or not much money at that point, if they are a full time student. Another benefit is you can utilize various investment options. So again, it doesn't have to just be all in cash, you're investing this money within the RSP account. So it could be in mutual funds, it could be in ETFs, which are exchange traded funds, it could be individual stock positions, also very flexible, really the only kind of restriction on that is the firm that you're with, as far as what kind of investments you can do. And another benefit is, you know, oftentimes people think, well, when your child's really young, and if you're starting this, you might go I don't know if they're going to go to school. Well, a great thing about these is your children don't have to go straight to post secondary, or that education right from high school, you actually have some time more beyond that. So I'm going to talk about that as well. But just to kind of get going as to why we're using these, it is flexible, you do have some time on it. So it doesn't mean that if you open one of these accounts, your child would be obligated to start pursuing a post secondary education straight from university. Because I know there's kids, you know, children that might like to take a gap year, they might want to take some time to think about it. So there is that flexibility. Okay, so I also want to take a moment now to get a little bit more terminology out of the way again, we love our industry jargon. So let's chat a little bit of bout some of that to just get it out of the way. So Canada Education Savings grant, I might be mentioning that or you might see that when you're reading about these plans, it's also known as CSG. So Canada Education Savings grant family plan versus an individual or specified plan. So it might be GO GO AFTER, might be referred to as a specified plan or individual. And then there's also the family plans. Family plans allow you to have multiple children on it. And it's a great plan for kind of pooling it together. So although you can't share the government grant portion that has to be used by the child That generated that grant portion based on their contributions, however, you can kind of pool the rest together. So your contributions and some of the growth that's been going on in the plan, if one child doesn't go to school, the other one can utilize it. So again, Grant cannot be used or shared between children, but the other portions can. So that's some of the benefits of having a family plan versus having just an individual plan for each child. And so if you also have just had one child, and you're considering maybe having more, you might as well start with a family plan, then you don't have to start with the individual plan, you can start with the family plan, and then you have that flexibility to add a child subscriber. So another term we use in these types of accounts is subscriber. And that is the person who makes the contributions to the RSP. So it can be the parents, it actually can be grandparents, it can be even, you know, cousins, aunts, uncles, friends of the family subscriber, it's a very wide range of possibilities. And it's something to consider for a US citizen. So let's say you're a US citizen. But right now you're residing in Canada, and your children have been born here. And maybe they're Canadian citizens, and you want to have an RSP account for them? Well, let's say you know, maybe you have a grandparent or someone else that's very close to you, or a parent, sorry, that is not a US citizen, they could essentially open that account and be the subscriber and then that could still be open for your child, because as a US citizen, you're not able to hold these plants, there's some rules, amongst them US citizenship and having these plants. So that's something to consider as well. And, of course, there's grandparents out there that want to, you know, be very involved in the saving process. And maybe they'd rather have their own account open for, you know, as the subscriber putting it away, versus sending the money to you and having contributed. So again, that's kind of just the, the dynamics behind the scenes, but other people can open these accounts, as the subscriber beneficiary is going to be who the contributions are designated to. So these are essentially your children, the beneficiaries to the account, who is actually going to be benefiting from this money, who is going to be receiving the money. And these can be added, again, as you have children, you can have multiple plans in place. So for instance, for couples that are separating or divorcing, maybe, um, you know, they want to take an approach where they're both saving, and they would prefer to just have it separate. So they don't have to have, you know, finances that are joined in any way for obviously, just ease and things like that. So again, there's alternatives, you can have a few of these plans in place, you don't just have to have one. Um, some important considerations for opening an RSP account is your child, the children child will have to have a cin number. So a social insurance number is required for the beneficiary to open it. So most kids now when you have your child, generally you apply for these at birth. So you should have that in place. If not, you're going to have to apply for one, there is a lifetime contribution limit of 50,000 per child. So you are only able to put in $50,000 per child, but there is no annual limit, there is an annual limit on what the government is willing to pay and match, I will get into that as well. But just to start off, know that your lifetime contribution is 50,000. There's no annual limit to how much you can put in. And, as I mentioned earlier, these plans can actually go a lot longer beyond just when they finish education or high school. So they can actually, the rule is they have to be completed by the end of the 35th year that they have been in existence. So that gives you lots of flexibility on timeframe for your kids to decide what they want to do with their lives. Okay. But I mean, it's good to start right away, if there's someone that are hard, if they're harder to motivate, maybe get them to go right away. Another definition I want to go over is what the government considers post secondary education. So I think a lot of people's hesitation to these accounts also relates to thinking, well, I don't know if my child's going to want to go to university, you know, maybe they're going to want to do a program that's at like a technical school or something like that, but it might not necessarily be a university. Well, there is a broad definition they have so I'm just going to read out series definition for post secondary education and or what this institute includes as far as where you can apply. Once you've saved up your RSP and child actually wants to use it. Well what can they use it for? So the in their definition, they say a University College or other designated educational institution in Canada, an educational institution in Canada certified by employment and social development Canada as offer non credit courses that develop or improve skills in occupation and occupation, and a University College or other educational institution, outside Canada that has courses at the post secondary school level, as long as the student is enrolled in a course that lasts at least 13 consecutive weeks. So by that definition and criteria, you'll realize it is actually quite flexible, it doesn't just entail that they have to go to the University of wherever you live. Okay, so there's lots of options there. Let's talk about the government grant. Because that's a real important fact, that is, you know, oftentimes the reason people are using these accounts, so the government grant, again, cesg, okay, the Canada Education Savings grant. So what this does is they will match at 20% to your contribution. So what you deposit into the RSP account, they will match at 20%. So if you put $100, in, they will put in $20. If you put $1,000. In, they will put in $200. And I could say all sorts of examples. And of course, there is a max though, as I mentioned, so the yearly max on what they're willing to put in is $500. And this is based on a joint net income of 98,000, or an individual

Kalee Boisvert: 00:16:24

income of at least I believe it's around 50,000 49,000, it might be the exact and then in those cases, it's a little bit higher, it's 600 per year, but the lifetime Max is still the same. So let's just for sake of ease, say the yearly Max is $500, the government grant will pay you $500 max. So if you contribute 20 $500, yearly, you will receive a $500. government grant to match what you put in. Okay, so you really Max 500. Now, of course, there's also an exception. And so or they will put in $1,000, up to $1,000. If you have unused grant room from previous years. So let's say your child is two years old, you just open the RSP account. So what you know, when they were born, when they were one year old, you didn't put any money in, you didn't get any grant for those years. So let's say for your two year old, you put in $5,000, the government will match $1,000 on that 5000, because you can catch up from one previous year. But you can only do one year at a time. So if I have a couple years, I can catch on, catch up on then it would have to be done the next year, the following year, and whatnot. And you can keep doing that. But again, max out at 1000. If you have unused room, if you don't have unused room, and you've been putting money in and maximizing that 500 grand each year, that $1,000 does not apply, it would only be the 500. Because you've you don't have any unused the lifetime maximum of what they're willing to contribute is 70 $200. So again, if you have two children and a family plan, it's 70 $200 each, or you have multiple, even more children 70 $200 each that they will match, unused contribution room, as I mentioned is carried forward. So if you have a six year old and you've never opened one of these accounts, that's completely fine, you can still open one no time like the present, and you can catch up for some of that grant, you qualify for grant up until the end of the year that they turn 17. So that matching of 500 a year or up to 1000, if you're catching up, is what you're able to get up until the end of the year they turn 17. But, of course, there's always exceptions. At 16 and 17, you can only receive grant, if you've had a minimum of $2,000 of contributions made into the plan before the end of the year, the child turns 16, or an annual minimum of 100 is contributed to the RSP in any of the four years before they turn 16. So what this rule is getting at is essentially they don't want you just opening an RSP when your child is 16. And just getting the grant then or 17 and just getting the grant then. So it's very much procrastination, they really want to encourage you starting this before the year they go to post secondary. So that's why they that's sort of the reason behind that strange little additional considerations there. So again, a lot of people like to focus on maximizing the grant, which of course makes sense. So maximizing that matching that they're receiving from the government. So there's a variety of ways to make that happen, and all different scenarios. So I'm going to give you a couple scenarios. Hopefully I can explain it. I have like a chart that I've done it on but hopefully I can explain it on a podcast. So let's say you open an RSP right when your child is born, and you want to focus on maximizing the yearly grant, so Your child is zero years old, you put in 2500, you receive your 20% grant, and that is $500 for age zero, then age 120 $500, Grant 500. And that just continues on from, you know, 234567 810. Well, once we hit age of 14, if we're just looking to maximize the grant, and we've been maximizing it all through the years, since our child has been born at age 14, we only have to put in $1,000. And we're going to get $200 grant. And that's going to get us to the 70 $200 in accumulated grant. So again, during the year, they are 14, you've maximized the grant by contributing 20 $500 a year. And let's break it down. What does that mean a month, $208.33 a month, or approximately $6.85 a day. So you can save your children's education and maximize that grant, you know, for the cost of a fancy Starbucks drink every day. So these are very realistic goals, we, we can be doing this for our kids, we can be helping them out a little. Another scenario, let's say you start at their their RSP at age five. So you weren't familiar with these or just wasn't a good time, that's fine. They're five years old. Now you can catch up on grants, actually, for the age from zero to four. So let's say your goal is still to maximize grant, but they're already five years old. So you have some catching up to do. So in your in the first year, it's open the child's five years old, you can contribute 5000, get $1,000 grant because we're catching up. And then for age six, do the same thing 5000 1000 to catch up. And you can keep doing that until age 10, you're fully caught up and you can go to 20 $500 to get the $500 grant to that point on. And you're still in this scenario, maximizing that 70 $200 grant at age 14, just you're put in extra for some of the early years to catch up. Okay, so those are two ideas or scenarios. But of course, to add to the complexity, these are just two examples. Um, there's many scenarios that exist. And if we work from the idea of you can contribute 50,000 per child as your lifetime maximum, then I can contribute the full 50,000 upfront, although of course, I will not get the full grant if I did that, because they will only give me 20%, or up to 1000 total to make up for previous year. So if they were born, I put in $50,000, I'm only gonna get $500. You could do a lump sum, and then a little bit more each of the following years. So again, all sorts of scenarios. Do not forget about getting invested, I want to stress that so part of the benefit of an RSP account is that it will grow with no tax implications. So capital gains, dividends, interest income being earned inside of this is not taxable, you therefore, don't just want it sitting as cash, you want to use some sort of investment vehicle, maybe it's mutual funds, maybe it's ETFs, exchange traded funds, that was our maybe it stocks. And of course, this is also like I mentioned going to depend on the firm you invest with. So if you're at the bank level, you open an RDSP. And they only offer mutual funds, that will be your option for investing. If you're with a direct investing or financial advisor, usually you're gonna have more flexible options where you can have some individual stocks ETFs, you know, kind of more more options, more alternatives to choose from.

Kalee Boisvert: 00:23:32

Now, the question is, then how do I invest? So I can't exactly answer that because of course, it's very dependent on the person and a lot of other considerations. But just quickly, some ideas to consider is that you want to consider the timeframe. And you're going to know the timeframe because it's based on your child's age. So if you're saving for their post secondary education and you have an infant, well, you can likely take on a little bit more growth type investments or be a bit growth here with the investing as they're an infant, because you know, you have the full 18 years until they're going to need to access it. When they get closer to graduation, of course, you want to scale back on some of that risk. Maybe you're starting this though, only when your child is 10 years old. And so there's only there's eight years left to go, that's not as long of a timeframe, that's probably more of a medium timeframe. And you don't want to take on as much risk maybe at that point or Well, they're 15 years old, even less risk because you know, they're going to be graduating and you know, about two three years time and they're going to be pulling on the money in that at that time. So some of the products that exists out there that work as well are target date funds. So how those work is you pick the date that coincides when they're going to graduate. So if they're going to graduate and you know, 2025, you pick that one or maybe it's 2030 and you invest in that one. Some of them don't have all the in between years, so you kind of have to maybe pick the one that's closest to when they will and how they work though is that If you're far away from that date, they're going to have you a little bit growth here. And then as you move closer to that date, they're going to continue to scale back on risk and reduce risk, until it's a lot more conservative as you get to the date that it's targeting. So that's a good idea as well of an option. Again, these are just ideas, it will really depend on your situation. And you'll want to have that discussion with an advisor. So I'm not giving out financial advice. Some examples when we look at just the rate of return, because I like to help you conceptualize this, it's not just about the money we're putting in, right, it is a big part of that growth, especially if we start early. So if you were to put in a $50,000 lump sum, and in these examples, I'm not factoring in the grant just for simplicity, if you put the 50,000 lump sum to start out at a 5% rate of return, in 18 years, it grows to about 120,000. So that's a lot of growth added into that, at a 7% rate of return, it grows to 169,000. If you just do you know, 20 $500 a year like we talked about to really aim to get that grant maximized, and what did I say it's like six or $7 a day, at 5% rate of return, that's going to be about $70,000, when they hit 18 years old, or at 7% rate of return, that's going to be about $85,000. So just conceptualizing how that rate of return is going to make a big difference to that's going to really add to that savings of what you have put away for them. So do be invested. As well, we can't just let it sit there as cash, one of the benefits is that that growth, the gains, the interest is not taxed. So some tips, some of my top tips for savings for children's education with an RSP are as follows. So I'd highly suggest start early rather than late for a variety of reasons. Specifically, it gives the money more time to grow and compound. So the earlier the better, contribute more in the early years, if you can, again, just more time to grow, aim for larger growth in earlier years. So when it comes to investing, try to allocate more into you know, growth, or investments that are going to generate maybe a little bit higher returns in return for a little bit more volatility, though, but in the earlier years, because you have the time, a longer timeframe, maybe it's 18 years, if we're talking that it's your it's an infant and young child. So do do that in earlier years, because as they get closer to needing to pull out this money, we don't want to be taking a lot of risk, right, we want to really reduce and make it conservative, because they're gonna need to be taking the money out, we don't want to have it invested high risk, and then all of a sudden markets crash. And what you thought you had for education savings is really reduced because of that. So that's never a scenario you'd want to see. So again, in earlier years, you can target a little bit growth here. And then of course, get conservative later on. I'm setting up a discipline saving strategy to make it easy and automate, I would highly suggest. So if you want to have it on a monthly basis, maybe it's $100 is withdrawn from your bank account on the 15th of the month, every month. And that just happens. And it's like paying a bill and you don't have to think about it because it's automatically being pulled from your account. So I'd highly suggest making it easy automating it. So you don't have to think about it, it's not another task,

Kalee Boisvert: 00:28:30

allocate a portion of monetary gifts along the way. So maybe you can make a rule that 15% of what your child makes from, you know, cash from birthday gifts or Christmas money has to go to their RSP. That's a great idea. And it's a great idea to teach your kids along the way what that means for saving for themselves and putting some away. So again, that's just an example. You can make them put the full amount away, I don't think that would fly with my daughter, she she would not be happy. If I put it all in an RDSP I'll tell you that she money burns a hole in her pocket. So let's talk a little bit about the withdrawing stage. So we've been talking about why you have these accounts, putting money in building them up. But of course, it's going to come to a time where your child is now graduated. Maybe they took a gap year or maybe they're going straight to university or college or whatever program it is. But now they're ready to take that money out. So if they do not go to these education institutions, if they do not use the RSP let's say they never end up going to school after high school. Well, this the C SG the Canada Education Savings grant does have to be returned to the government. So that was money given to you by the government. And the point was to support their education. If they do not go you have to give back that portion. So that's the portion that will have to go back. That is all it has to go back. Again, it was their money to begin with. They wanted to give it to you to support education. If the education does not happen, then they take that back if the child attends there's two types of withdrawals. So there's a post secondary education payment, which is a PSC, and it's with the contributed portion. And then there is an education assistance payment EAP. And it is made up of the non contribution amount. So think of your RSP when you're putting money in having two parts to it, the money you put in, so that's your contributed portion, your PSE, and then there's growth. So capital gains, there's interest, there's dividend income, and there's government grabbing putting in, and that's your other portion all grouped together. And that's the EAP educational assistance payments. So for your PSE, again, it's it's not going to be taxable, because it's money you put in with after tax money. So there's no limit to the amount they take out of that. And it is not taxable as they take out the PSE portion portion. So the amount you contributed that value, the EAP, a little bit different because it is again, growth, it is government grant, so it's not already taxed income or money in your pocket, right. So from this amount, it will be when a student does this type of withdrawal from the RSP. So when they pull out EAP portion, it is taxable, and it's taxable in the hands of the student, okay, so, but of course, that that could be or should be beneficial being that they should be in a very low tax bracket. And the rule on it is you can take out $5,000 from the EAP portion in their very first 13 weeks starting. And then after that, there's no limit. So when we talk about withdrawing money, I also want you to keep in mind that you only have to provide proof of enrollment. So you don't have to provide receipts necessarily for what you paid for tuition. So let's say the child paid $3,000 for tuition for this first semester. But they have other costs, they have books, they have laptop, maybe they're living away from you, and they're gonna be paying rent and things like that. So you guys do the math, and they actually need to take out more like 8000, for instance, for their first semester, I'm just throwing out numbers. So don't get panicked. So if that's the case, you can request that amount be taken out, you don't have to just say I'm like, like, you can't, you don't have to only pull out the portion that's going to cover the cost of tuition, it can be a larger amount, and there's, the banks aren't gonna say, Okay, give me some proof, or what are you paying for, you really just have to give them the proof of enrollment and tell how much money you're going to want to pull out. And that's it. Okay. Um,

Kalee Boisvert: 00:32:28

so some tips on withdrawing being those scenarios. So let's say for instance, your student enters school in September, right after graduating, they just completed high school and they were working minimally. So their income for the year will be very low. So consider first pulling more or all EAP portion. Okay, that educational assistance payment portion, because it's taxable in their hands, it starts to use some of the government grant, which you want to be using right away, cuz anything you don't use of that you have to get back scenario beat, let's say midway through their education, they do an internship and it's a paid internship. So all of a sudden, they're making $40,000 that year, because they got paid to this internship. And so they're in a higher income bracket, you might want to consider then using PSC in that portion. So the post secondary educational payment portion, that's contributed portion is non taxable. So again, for the most part, though, you always want to be using that EAP. First, because that's going to use up the grant right before for you don't want to forfeit grant, you don't want to have to give it back. So generally, people start with pulling on that portion first. But again, there are scenarios where they're making more money, and it might not make sense. So that's again, all scenarios are different. But those are just to give you a few examples. So that sums up what I wanted to share on this episode of RSP accounts. Remember, you don't have to be the expert. If you're listening, you know, while your child is still young. And this part about withdrawing is getting a little confusing, you're likely going to need a refresher come time to actually draw on this. So really, again, the goal is just to be aware of what our RSP accounts it count is, how you use it, how it benefits you, your child for their education savings. And that was really the goal. So hopefully gets you thinking about some things. Hopefully it gets you saving for your children. And thank you so much for listening to this episode, and I will catch you on the next episode. Thank you. Bye.