Video Transcript
Are RESP’s worth it? Should you contribute to an RESP?
That’s what we’re going to try to talk about and figure out today.
First thing is what is an RESP? An RESP is a Registered Education Savings Plan, which is a tool available in Canada to help you save for your child’s post-secondary education. There are three main benefits to an RESP.
First one is that the government will match your contributions. They will match 20% of your contributions up to $500 a year (of their match) to a lifetime maximum of $7,200 per child. If in one year you contribute $2,500, the government will match 20% of that up to $500, so you have $3,000 that goes into the RESP. So the first benefit is government matching.
The second benefit is that the income earned on the money in the RESP is tax-free (it grows tax-free) until the point that it’s withdrawn for your child to go to post-secondary education. So tax-free growth is the second advantage.
And then the third advantage is that when your child takes the money out to help pay for their post-secondary education it’ll be taxed on their tax return at their tax rate (which usually should be lower as most students don’t have a very high income) so they won’t pay a lot of tax (if they pay any) on the income that they pull out of the RESP.
Those of the three main benefits, so it sounds pretty good! Why wouldn’t you do this?!? Well there’s a “but”… there’s always a “but”! So the “but” for an RESP is that you really only want to be putting money into an RESP if it’s money that you expect to stay there. It’s not something that you want to be putting money into… and taking it out… putting it in… and taking it out… because if you pull the money out before your child goes to postsecondary education there are two things that happen.
1) The income is taxed on the parent’s tax return. (The money that the parent put in they can take out, there’s no tax. The money the government put in the government is going to take back. But any income that was earned on it will be taxed on the parent’s tax return). AND there will be a penalty… a 20% penalty is charged in addition to the tax. So that is one disincentive to be taking it out early.
2) And the second one is that you lose the money the government contributed. As I said the government takes their money back and you can’t get that back. Once they’ve taken it back you don’t get another shot at that money. There is still that lifetime limit of $7,200. So if you gave $2,000 of the government money back because you took the money out “too bad, so sad” you can’t get that back if you start re-contributing back into the RESP.
So you want to make sure the money you’re putting into your RESP is money that you expect to stay in the RESP until the child goes to post-secondary education.
So how do you make sure the money you put in an RESP stays in an RESP? Well I would say there are three things you should have in place before you look into putting money into an RESP.
1) The first one is you want to be debt-free except your mortgage. There are a few reasons for this. One is that it doesn’t make a lot of sense to be paying 20% interest on a credit card when you’re putting money into your RESP. Also if you have a lot of debt because you don’t have control over your spending then as your spending starts getting out of control you may be tempted to pull money out of the RESP to pay for some of your overspending. So the first thing is to be debt-free except your mortgage.
2) The second thing you want to have is a six-month emergency fund. This is also so that you won’t be tempted to pull money out of your RESP. If you have an emergency fund of six months of expenses set aside if some emergency comes along (or something unexpected comes along) you can use that money instead of trying to take money out of an RESP to pay for those things.
3) And the third thing that’s a good idea to have before you contribute to an RESP is you should be taking care of your own retirement first. Because if you’re talking about your child going to post-secondary education there are other potential options or other ways that could happen; the child could work and pay for their own education… maybe they could get scholarships… maybe they won’t go to post-secondary education… or maybe they can look into lower cost options. Lots of kids go to university or college or some sort of post-secondary education without any help from their parents. But when you’re looking at your own retirement the only one that can take care of that is you! Retirement should be a higher priority than saving for post-secondary education for your kids. Make sure your own retirement is looking okay before you look into an RESP.
So again the 3 things are; #1 – debt-free except your mortgage, #2 – six-month emergency fund and #3 – make sure your own retirement is looking healthy before you start contributing to an RESP.
There you go… no straight answer. It depends on your situation, so you need to sit down and talk about it and figure out what’s right for you.
If this made you think of any questions feel free to comment or get in touch with me.
That’s it for now!