Jayson Lowe breaks down Canada's RESP: who can open one, contribution limits ($50,000 lifetime), and how government grants work (CESG matches 20% of contributions up to $500 yearly). Withdrawals are taxed in the student's hands, and excess contributions face 1% monthly penalties. Watch for fees that can eat into grant benefits and impacts on student aid eligibility.
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If we look at all of the players and the roles in the RESP equation, the government, the promoter and the trustee lost nothing and got paid. You took the risk and walked out with the empty bag in your hands. The certainty of whether your child goes to post secondary education is completely unknown. The earlier you start saving for the plan and your child decides not to go that route, you actually end up receiving severe consequences and penalties.
Are you watching this video? Because either you or someone close to you either has a child you care about or a soon to be born child. I know you are a financially responsible individual and instead of giving gifts directly to the child, you'd rather start them off by building an resp which is short for a Registered Education Savings Plan. Maybe you've heard from current students or have had read some articles, done your own research to find out that post secondary education is very expensive. At least culturally for me. We give children red pocket as forms of celebration for the wonderful moments of their life. Maybe there's something similar in your culture and with the blessings that the child has received, the next step you would probably take is to put that money into a RESP to help build the savings for their investment in post secondary education. Well, have you ever wondered whether the RESP will actually help them? You're told to save money into the RESP because that's the best way. One of the best blessings I've had in my life are my parents. I have endless gratitude for them because they did the very best that they could. They hustled, they worked long hours, including weekends, to provide for both myself and my brother. However, when it came to post secondary education, I'm not ashamed to say that they couldn't afford it. If we look at today's poverty line income in 2022 for Canada, it's around $33,000. And just for you to understand my world, both of my parents income combined didn't make more than that, at least in terms of enrollment. I was fortunate enough to go to Canada's largest university for tuition and books alone. That costed me $20,000 a year. And that was over 15 years ago. If you add the fact that my brother also went to the same university program as me when I started my third year. I mean, how could my parents afford it? It actually pains me to even think about giving them that responsibility of even paying for my post secondary education. I was very fortunate enough to qualify for the Ontario Student Assistance Program, otherwise known as osap. And because of my three co op terms at one of the big four accounting firms. The combination of these two allowed me to pay for my post secondary education and and spending requirements. Like any university student, my brother and I lived on the very cheap. We had low cost food and we only spent where we needed to. But none of that mattered because we had a very enriching university experience. I was very fortunate to graduate with minimal student loan debt. Yet somehow it's almost like a rite of passage to be living on the cheap to pursue education with the hopes of giving you a better return in your future life and get crippled with future debt. Well, with the rising costs of post secondary education, you've probably wondered would you be able to save up enough for them? What if they decided to go abroad for school? What can you spend the RESP money on? Well, I'm here to share with you that there is an alternative to saving for post secondary education and and it involves changing the way you save for it. It doesn't impose the similar restrictions the RESP has attached to it, and that process is taking control of the banking function as it relates to your needs and when in this case your needs would be your child's education. If you want to learn more, make sure you visit watchibc.com where you'll get a free 90 minute training on what this process entails. It may come as a surprise to you that 80% of parents aren't able to accurately estimate post secondary cost. While you may know cost for education is high, many only think about the portion that it relates to tuition. Many families don't actually know the all encompassing costs and how high the cost can be when it comes to pursuing post secondary educations like purchasing books, supplies, groceries and accommodation. If you fast forward to today, I'm also an instructor at the very same university I've graduated from, so I very much get the chance to chat with the experience of current students and understand the dynamics of their university experience. Now, a poll back in 2016 from one of Canada's leading banks have said that parents looking to send their child to college or university for four years should count on a total of of costs of at least $100,000 or $25,000 per year. I'm certain that if we take into consideration of the program of study, with the current Canadian economy coupled with inflation, these costs for education would be much higher than it is today. Now, the topic of this video isn't focused on the rising cost of education, but I wanted to ask you some questions. Have you actually wondered, when they come of age, whether post secondary education is something they actually want to do? What if they decided not to go to post secondary education? What happens to your resp? So let's open the conversation today on talking about the RESP and whether or not it is the right vehicle for you to save for your child's post secondary education. Now, for most people there's a lot of surprises that you will uncover when I go through this video. Irrespective of the path that they choose, you will find surprises of if they go to post secondary education or if they do not go to post secondary education. When it comes to the resp, this video isn't meant to bash any financial advisors, money managers or the resp. I finally want to make sure that you know that this is not financial advice and I want to make sure you speak with a financial professional who can properly assist assess your personal circumstances. The resp started in 1998, so it's been around for almost 25 years. When it comes to learning about the resp, it's important to understand the background of the resp and understanding the roles of the players. So let me define the roles according to how the CRA defines them. First, there's the subscriber. The subscriber is the one who keeps contributing to the RESP plan without failing and makes savings that generally would be you. Then there's the beneficiary. The beneficiary is someone who is designated by the subscriber to get all the benefits of the RESP scheme in the form of educational assistance at the time of higher education. The third role is the promoter. And the promoter is the company which offers the RESP and manages it through the years. This can be banks, this can be mutual funds companies, scholarship foundations and trust companies. I want to further clarify specifically in detail the role of the promoter because it's important to understand their role and what they do. They ask the CRA to register the plans on behalf of the subscribers. They apply to the grants and benefits on behalf of the subscribers. They receive and deposit the grants into the resp. They inform whether it was paid or not. They maintain and submit monthly records of RESP transactions to the Employment and Social Development Canada. They confirm beneficiary eligibility, especially when it comes to administering and paying the educational assistance payments to that eligible beneficiary and they provide monthly reports of the total breakdown of the amounts paid. The other role in this whole equation is the trustee, and the trustee is the company which holds the amount invested and adds the additional advantages offered by the federal government to the RESP plan. And since this plan is registered. There is also the cra, which is short for the Canada Revenue Agency. They register the Education Savings Plan contract as an RESP under the rules in the Income Tax act, which include defining taxable events and lifetime limits of the plan. They can also provide the Canada Education Savings Program with the income related information for primary caregivers so that eligibility for the Canada Learning Bond and the Additional Education Savings Grant can be determined. What's important for you to know is that you provide your social insurance number, also known as the sin, to register the RESP and you also provide the the SIN of the beneficiary. This therefore, as the name implies with the registered plan, means it's under the influence, control and visibility of the government. The RESP has to be completed by the end of the year. That includes the 35th anniversary of when the plan was open. Anyone can open an RESP account for a child. This can be parents, guardians, grandparents and other relatives or friends. So now you know about the roles and responsibilities of the resp. Let's dive into the mechanics of the RESP and more specifically the contributions. What's important for you to understand is actually how money flows in and out of your life. And when it comes to this vehicle, is it adequate enough to reach education amounts for your child? When it comes to the resp, it starts with the subscriber which would be in this example you. The subscriber enters into the RESP contract with the promoter and names one or more beneficiaries which could be your child under the plan. Now from 1998 to 2007, the annual contribution limit was $4,000 and the maximum lifetime contribution limit was $42,000. From 2007 to currently the lifetime limit on contributions is $50,000. Your contribution to the RESP actually has no annual limit, meaning you can decide how much each year to put into it. It's not capped, meaning you can decide how much each year to put into the RESP so long as the amount of that money that you've put into the RESP or the plan fills the lifetime limit of $50,000. Now what happens if you over contribute to the RESP maximum of $50,000 while the penalty to that you will pay taxes in the amount of 1% per month on the on your share of the over contribution until it is withdrawn. In order for you to make contributions for a beneficiary, it can only be made if either the beneficiary's social insurance number is given to the promoter or before the contribution is made. And the beneficiary is also a resident of Canada. Generally, you can contribute to family plans for beneficiaries who are under 31 years of age at the time of contributions. However, transfers can be made from another family plan, even if one or more of the beneficiaries are 31 years of age or older at the time of transfer. To determine if the lifetime contribution limit has been exceeded, the Canada Revenue Agency takes into account all contributions made for that beneficiary, even if they have been withdrawn. The emphasis here that I want to make sure that you know is that when you hear the name registered, there's typically some confusion with something like the rrsp, the Registered Retirement Savings Plan. When it comes to the resp, the contributions or the money that you put into the resp, it cannot be deducted from your income on your income tax and you will not benefit from that tax savings. In addition, if you borrowed money to fund the resp, you actually are not allowed to deduct the interest you paid on the money you borrow to contribute to the resp. Let's talk about the balance growth. There are various ways the RESP balance can increase. The first is the money that you put in as contributions that will bring up the increase. The second is when you use that money to buy financial assets like stocks, mutual funds and other portfolio type funds. Now, depending on what you buy, you'll receive a particular type of income. If you've watched my video on personal income taxes in Canada, you'll learn that different income types attract different income tax rates. Well, one of the key attributes that you may understand is that the income that you receive in the RESP is not taxed in the current year, the sources of income you can likely receive are interest income, capital gains and dividends. Now, depending on the type of income you receive, I want to make sure that you understand there's a trade off for this tax free growth in the RESP, which will result in actually losing favorable tax consequences in those specific income types when they are received in the resp, it basically neutralizes and makes no difference what type of income you receive. I'm not going to go in depth on this because when you watch this video later when I do a comparison, you will understand what I mean. The next category of ways the balance your RESP can increase actually comes from government grants that you qualify for. These grants can be the Canada Education Savings Grant, it can be the Canada Learning Bond, or it can be any designated Provincial Education Savings Program like from Alberta, Saskatchewan and Quebec. When it comes to The Canada Education Savings Grant, otherwise known as the cesg. This can get rather convoluted, so let's walk through using numerical numbers to explain how the CESG works. They will pay 20% of the first $2,500 in annual contributions made to the RESP. This means that the max the Government of Canada will provide as a grant for each year is $500. This also means that if you contribute more than the $2,500, the government does not provide any more grant funding for that year. When it comes to the cesg, it's also important to recognize that if you staggered your annual contributions to be at least $2,500 each year, you will receive the maximum $500 grant from the government. The maximum you can receive in total of the grant is $7,200. To receive the maximum of this grant you would need to contribute $2,500 for 14 years and $1,000 for one year. So over 15 years you would contribute $36,000 relatively evenly to maximize the $500 in CESG each year. Now, previous grant room can only be bought back one year at a time. Here's an example. If you did not contribute last year, that means if you contribute 5,000 in the current year, you will receive $1,000 in the CESG in the current year, $500 from the prior year and $500 in the current year. If you do not fund the RESP for two years and on the third year you fund $7,500, you will only receive the $1,000, meaning you lost the $500 from the first year you did not contribute. This prevents a one time lump sum of $30,000 $6,000 to receive the $7,200 benefit. The next grant paid is called the Canada Learning Bond, known as the CLB. This was introduced in 2004. It was given as a way to encourage low income families to use a RESP for saving money to be used for child's post secondary education. The main eligibility criterion for this CLB is based on the level of income it must be applied before the child turns 18 and there's a differing amount for the amount of children that you have. But for simplicity I will just explain. If the number of children is less than 3, with an adjusted net family income of 49,020, you will receive $500 for the first year of eligibility and $100 for each year the child continues to be eligible to which they turn 15. So the maximum you could receive for this Grant would be $2,000 now, with respect to the individual provinces, be sure to visit the provincial websites to learn more about their qualification criterion. Going back to all of the payments that you contribute to in resp, what I want you to understand, under the Canada Education Savings act and under designated provincial programs, those grants are not included when determining if the 50,000 lifetime limit has been exceeded. So that means you can contribute the maximum $50,000 and add on top the three grant sources. Now, if you look at the grants and we look at how it qualifies, how you can qualify these grants and how they're structured, it's quite rare for a family to maximize multiple grants. Most Canadians only receive the cesg. The CLB may not be offered for most people because of the income maximum ceiling. And if we look at the practicality of it, a family adjusted income of $49,020 is practically saving $2,500 annually to activate the maximum for the CESG. And that actually is about 5% of the family's income, which is dedicated for post secondary education, which can actually be quite burdensome to take advantage of while if you're living in the current realities of the high inflationary environment that we currently have in Canada. So now that you understand your role in terms of the contributions and how the government programs can supplement you, meaning if you want to maximize your full resp, excluding the CLD, you would need to contribute at least 36,000 to receive and maximize the benefit of 7,200 from the CESG. This brings the total up to 43,200. This is where things get really interesting. The biggest myth I want to address is that you probably look at that 7200 and think, well, excluding any compounding, you've already gotten a free 20% from the government. Let's unpack the discussion around the pool of money that is built and whether or not it is actually 20%. The first is that you have three general options of managing your funds. The first is through a self directed RESP account where you manage it yourself. The second is you have a regular RESP and you fill it with mutual funds or any other products the provider offers you. And when you do this, you basically hand over the control of the outcome to the fund that you put your money in. The third is you enroll in what's called a group resp. And what a group RESP is that earnings and grants of all the participants are grouped together. The plans are set up by birth year, so if your child was born in 2006, they would be grouped together in A plan with others who were born in 2006. What's important to understand now is that though compared to option one, managing it yourself, ultimately the risk and responsibility is placed in your hands to ensure the value of the account grows enough so that your child has enough money to use from the resp. Now, the RESP under option one is essentially a house that holds the various assets that you decide to put the money that you decide to put into it. When it comes to options two and options three, the relationship gets a bit more complex, but it's generally the same, except instead of you taking charge, which is based on your time and your expertise, you hand the money off to someone else to manage it. The typical investment options that are offered will be extremely limited, especially when it comes to the group plans. And they're limited to fixed income investments, namely bonds. The idea for this is that they go for a lower rate of return for the increased safety of principal protection. Remember when I went into the details about the promoters? Well, for the extent of responsibilities that I've described earlier and everything that they do, the cost involved can be very high. What's important to understand is that when it comes to option three, group plans are marketed by commissioned citizens, salespeople. There is a steep cost to joining the group plan, which can be as high as the first two and a half years of your contributions. This amount is not actually going to come out of your pocket since it's actually going to be deducted from your contributions for the first year or two. Now, are you with me yet? That was just the upfront charges. What about the regular maintenance charges on the self directed resp? Your experiences will vary, but you will end up paying for turnover charges like commissions, account fees, and if you invest in mutual funds or ETFs, you will have to pay for MERs. If you are using option 2 and option 3, not only are you paying for the MERS on the funds the money goes into, but you will likely pay what's called management fees. And there are annual account charges applied on top of those management fees. The initial fee is usually refundable at the discretion of the RESP provider and is typically paid back once the child starts going to post secondary education. Furthermore, they have very strict contribution schedules. If you don't stick to it, you might forfeit that enrollment fee. I hope at this point I haven't lost you because I understand when it comes to the fees, with the lack of transparency, the complexities and nuances in how these promoters and trusts charge you in terms of Fees for your hard working money. It's very easy to get lost in the details and overlook critical elements which is you just want to save your money to help your child get to post secondary education. Why is it so extremely complicated? And I also want to add in here, you are the one working for the money. You are the one providing the money to them. In exchange, you are putting that money at risk, which by the way, the value in your account can go down and when it does go down, they get paid for administering the resp for you. And when the value of the camp goes down, they they're still going to get paid their fees for their service. This will probably make more sense to you if I walk through an illustrative example to show you. What's also very important when I go through this illustrative example is inflation. Now inflation is an extremely complex topic and to get more background on inflation, please make sure you visit our channel for more information on this topic. Now for the purposes of this calculation it's not feasible to incorporate much of the inflation. But let's walk through the example. So what I want to walk you through is an illustration of some of the information that I'm preparing here. This is a very specific illustration example. It's not meant to capture the complexities of real life. But I want you to take this information in in terms of directional and estimates. So let's take a look at an example here. Let's take some assumptions of the annual contribution is 2,500. This contribution amount is going to access the cesg grant of $500. Let's assume the child is three years old and enters post secondary at 17 years old. So it'll take 14 years of contribution into the resp. And the marginal tax rate I'm just using here is 30% just to keep things relatively simple. So the next thing I want to talk about is the three option. When it comes to the resp and when we look at the resp3 options there is actually the resp option that self directed one there is the regular option and then there's the group one and for additional purposes that I'll show later is the register. And of these three options the first one I'm going to talk about is this self directed resp. When we look at the self directed resp, what I first want to highlight and talk to you about is the return rate and I'm assuming a return rate of 5%. Now what I want to make sure that you understand and what I'm highlighting in terms of this 5% is there is no guarantee that you as self directed, not putting your skills down or anything, but it's just to say that the consistency of achieving 5% in terms of a return rate is generally not guaranteed. So this is really important for you to take in when it comes to looking at this consideration. The second thing is I'm also assuming that under the self directed option you would put your money in a fund like a mutual fund, which will charge you a MER of 2%. Since this is self directed, there are no management fees and there are no enrollment fees. So the net return after paying the fees would be about 3%. And the other part I do want to talk about and highlight is at the time of this recording.
The inflation rate for January was 4.3%. And I also think it's really important for you to understand what this 4.3% looks like. And the 4.3% inflation that I'm using is actually called the consumer core core consumer prices, not actually the inflation rate. The actual inflation rate for February was 5.7% but I'm using the core consumer rate to include just the cost of what education and supplies and goods would be. Inflation rate includes a lot more other items. But the topic of inflation is quite complex. But that is beyond the scope of this, this, this, this video here. So when we look at the inflation rate that I'm using here, this is to illustrate that the rate that I'm using is actually going to be the 4.3% as of January. The rate was changed on March 16th. But when I'm looking at the 4.3%, this is where the core consumer rate was at. And if we look draw this across, we can see that Approximately at around 1988 for the next 15 years to about 1995, 17 years. This is what inflation rate was generally stowed into. Now this, this rate changes every month. But what's really important to understand is it, it in terms of this calculation that I'm sharing with you is not being used but that will affect your real rate of return that you would get from for your money. So going back to the illustration, what you're going to see is the self directed option should include that inflation rate or core core consumer prices. And that is 4.3%. And if you incorporate that, that is going to be negative 1.3%. So you're actually losing purchasing value in despite the return that's happening. Despite your return being 5%, you are paying 2% in terms of MER. So what you're Actually getting as an increase in your value of account is 3, 3%. Now what it but because inflation is not is invisible and it's not really showing in your account because outside in the economy when you need to spend the money, the money is going to the. In terms of the amount of money you need to buy those goods and services, the prices have gone up which is that 4.3% that in this example right here for the inflation to be properly affected you would need to show this 4.3%. And so the real return on your money is actually losing 1.3%. But that's beyond the scope of this. And just to remove the complexities of it, I have not included inflation and real return in this example. So if we look at the dollars that you are contributing, you would be contributing 2,500 in terms of the contribution. And because it's put into a self directed RTP and it matches the criteria, you would get the CSG grant of $500. So the total contribution would be $3,000. And of that $3,000 over the 14 year period that is going to accumulate to $42,000. When I put this in the investment compounding calculator after fees it's going to include 52,000 7. 97. So just to make sure I clarify the 42,000 with the investment compounding every single year of putting in 3000 and compounding at the 3% which is net of fees is 50 2007. 97 the 61736 is is excluding the fees. So which is at the 5%. Now if we take a snapshot specifically to the amount of increase the increase in terms of what has been achieved from the 42,000 to the 52,000 the money has increased 10,007. 97 but if had it not been with the fees if we look at the total this would be the combination of these two. But because of needing to pay fees this the fees and investing in the funds you would pay 8,939 in those fees. And if we just. I'm just putting right here the consumer sorry the cesg which is $7,000. So you can just see for for perspective the the fees that you're paying on your investment on those funds you will increase 10,079. 7 the fees that you're paying is 8,939 and the grant that you are going to receive is just enough is not even enough to cover the fees that you would pay. So now what if if you follow the second option which is to Invest the funds into a regular RESP account where actually it's actually being, where it's actually being managed. And under the managed scenario I've put in the same assumption that let's say you're putting it in a fund that's giving 5%. And because you're putting it in a fund with the Trustee, there is 2% in terms of the MER. And because it's also being managed, there are what's called account fees of 2%. So after you've taken your rate of return less all of the fee other fees, now the net return is 1%. If we look at the net return of the 1% and we take it into context of the inflation of the core consumer inflation of 4.3%, that is going to be a loss of 3.3% in terms of a real return. So you are actually losing three and a half 3.3% in terms of the value of the money, excluding the loss of the value of the money. Let's just assume the net return is 1%. Taking the same $3,000 and applying the contributions for the 14 years, the total contributions again would be $42,000. And based on that, the net balance before FEES would be 61,007 36. And once you incorporate the fees that 61736 actually becomes 4045 to 91. And if we compare that to the self directed that's mainly driven because it's being held with one of the RESP promoters. And because of all of that, we look at the amount of money that you put in compared to the amount that you get out at the at the time of 17. Let's just say you want to access in terms of the account value at 17, the value only increased 3,291. And if we look at the value that has increased, you have received 3,291. Whereas in terms of this journey, the amount of money that she lost to fees to the fund and fees to the account would be about 16,445. So if we compare the 16,445 to again the grant. Now the spread between how much is paid in fees compared to what you receive in grant is now even significantly less. If you add the amount of increase that you get including the free money that you get free money with criteria that you get with the CESG, the total here is 10,291. And in the circumstance of of this case you can see that the someone else already gets more money than you would get. Now let's let's take a look at the third example of when you use your RESP with a group. So when we look at the third example with the RESP group, remember what I mentioned, that the type of funds that they put the money in would be in fixed investments such as bonds, and those typically don't provide a high returning yield, especially in today's interest rate environment. So the return rate on these products are going to give you about 4% and they are going to be managed in a fund which is going to generally could potentially charge you 2%. And lastly, in terms of this, you're also going to potentially pay 2%. Now, what I didn't talk about in terms of all of these three options is because each individual experience is going to vary, there's likely going to be transaction fees, like for example, in the self directed account, when you sell and buy and sell ETF stocks or any mutual funds, you're going to have to pay transaction fees. Also what I didn't include were the account fees where again, depending on the provider that you're using, they may charge you monthly account fees that are not also calculated or incorporated in this consideration. But the very least when it comes to an RESP account, you will typically have these account fees that you need to take into consideration and which will further draw down the amount of money that you would actually earn. When it comes to the RESP groups, there is what's called enrollment fees. So when you are putting money into the RESP group with enrollment fees, they could cost up to two and a half times of your contributions over the first two years. Now if your contribution was about 2,500, that could essentially mean anywhere to about $5,000 that would be paid over the two years. So that's what enrollment fees is potentially going to charge you. Now, I have not included that in this particular calculation, but I will talk about what that looks like in the future because the consideration is if your child does go to post secondary education, depending on the arrangement, the likelihood of you getting this money back after 14 years is quite likely. So to further go down in terms of the results, we're following the same logic of the $3,000 contributed for 14 years to create the 42,000. With the 42,000 based on the investment calculator, before the fees, it would be 57,071. After the fees, essentially the amount of money that has been attained or grown is basically zero. So remember, this is also not included, including the consumer price inflation that I've put in there. Of the 4.3%. I have not included that. So what that means is over the 14 year period, the value of your money actually has gone down, meaning the price of education, the cost of education has gone up, but your money that's been sitting in your account has not moved in alignment with that. So with that amount. So nonetheless you are in this case, here is where it's showing you, you are likely losing value in what your money can buy. Now if I were to further add. So since there was $0 accomplished between the contributions and the growth of your money over the 14 year period, if we look at and dissect the amount of fees paid to the trustees for the funds, the account, the value for the accounts, and also the group, you're essentially paying about $15,000 in terms of fees. And again, if we look at this, the CESG that you would receive for sticking to this all the way. So if we look at the scenario you actually in terms of money gained, the only money that you've gained is 7,000, but someone else has made more money than you of 15,000 7, 1 and you haven't increased the value in your account to be applied. If we were to look at this in the context of a savings account, you could still come to the same place with our very low 0.25 interest rates that are available with your money just sitting there. At least someone else didn't get paid $15,000 while your money stayed there, earning nothing. Instead of putting money in the resp, let's put this money in a unregistered account. So if we put the same money in the unregistered account, I'm applying the same assumptions of the five 2, 3%, no different than what was in the self directed resp. And so the net return is about 3%. And following the same assumptions. Now the difference here would be that you would not have a grant of $500 because you're putting it in an unregistered account. What's really important for you to understand is unregistered accounts can only be registered to individuals that are 18 years and older. Meaning this unregistered account can actually be registered in the name of your child or the beneficiary of who you want to have this money for. So any gains or losses and interest or dividend income that you get from this account is going to be added into your personal marginal tax rate. So if we follow the same assumptions through and get to the contributions of 2,500 times 14 years, it's going to be 35,000. And of that 35,000, plugging it into the investment calculator, the total amount is going to increase to about 51,446. Now if you subtract the fees after that compounded growth, it's going to be 42,648. So if we look at the comparison of the increase in the fee, the increase in the value of your account, the increase net of the fees would be almost $9,000. And since this is in an unregistered account, I've assumed some taxes of that 30% which you will have to pay this 1003, 50. And if we look at the fees that are incurred for the investment fund that has been paid, the total amount is 8,798. So if we look at this exchange between you, the investment account provider, adding in the taxes that you would pay, if we add that together, the total amount of money that you get is 6,706, 47, 7,006, 47. And the total amount that you paid in fees along this 14 year journey is 8798. So even though your money went up 7006, 47 along the way, irrespective of how the investment value has performed, the fund that you put your money in is going to walk away with about 8,798. Of course, again, the example that I'm sharing with you is very theoretical and restrictive. But the point I'm trying to make and show you is that within the same money that you're going to deposit across the generation, either of the 2,500 that you are contributing, this 2500, depending on how and where it's being placed, is going to give you drastically very different outcomes. And during that journey that your money goes through, whether it increases or decreases, a significant portion of it is being lost to fees. And depending on which option you choose, someone else is getting paid much more money than you are for your own money. Let's now get to the point of what you've been saving for, which was the whole objective was for your child's need for the money to use for education. And when it comes to using the resp, provided the program is a qualified educational program, the money that comes out of the RESP actually comes out in the form of an educational assistance payment known as eap. In the case that the child does go to a qualifying educational program at a post secondary educational institution, and that's defined as apprenticeships and programs offered by trade schools, colleges and universities, the requirements for full time educational programs are that it must be for at least three weeks in duration and spend at least 10 hours per week for the first 13 weeks. The students will be able to access $5,000 once 13 consecutive weeks have been completed. There is no limit on the amount of EAP that can be paid out and received as long as the individual continues to qualify for the payments. For cases of part time educational programs, the criterion is the student must spend 12 hours per month on courses or work in the program and the maximum EAP paid for the part time student is $2,500 each 13 week semester. Ultimately, the amount that comes out as the eap, the portion that relates to your initial contribution comes out tax free. The portion that comes out as gains will get taxed in the hands of the beneficiary which is your child or the student. If we were to go back to what the balance growth increases come from, that's going to be number one, the income generated from your investments which would be the interest, dividends and capital gains. The second would be the CESG and or the CLB grants. Furthermore, the beneficiary may claim tuition tax credits and education tax credits to offset this income. So ultimately the taxes are washed out in the hands of the student. Let's say life happens because it does and your child or beneficiary of the RESP may decide to go to school abroad. Well, what's really important to understand is the portion that relates to the grants that you receive from the Canadian government that you would have received will not be paid for in the EAP and therefore the only taxable income to be included would be the investment incomes. These would be actually neutralized from the tuition tax credit. Now the final alternative for you to actually realize is that your child may decide not to attend post secondary education. Remember, the balance accumulated in your RESP consists of those three portions. Here's what will happen to them. The subscribers portion, which let's say is your money that you've put in, can be refunded tax free to the subscriber, you or the beneficiary, the child. And this is after all the fees have been paid out to the promoter of these contributions, the CSG. Remember that 77,200 maximum grant, it must be repaid back to the government of Canada. The next one I want to say please brace yourself when I explain that the portion of the investment income depending on the option in how you have set up your respondents, the investment income that you've earned, especially if it's with the RESP group. And depending on that arrangement with the group, what could happen is all of that gain that you've gotten could be completely forfeited, meaning you get nothing. The second one is it can be paid out to the subscriber, which is you under the conditions of what's called the accumulated income income payments. So this is if it's not under the group option, this is if it was a regular, self directed or a regular resp. And this is known as the aip. If it comes out in the form of an aip, the amount of the income that you receive will be subjected to your regular marginal income tax rates plus an additional 20% tax on top. The income that you receive from the AIP will be taxed at your marginal rates with an additional 20% tax added on top. Now this can be avoided if the AIP is transferred to an RRSP of the subscriber or the subscriber's spouse. Whatever you decide. What I want to highly recommend to you is take a look at the three of my RRSP videos where I go into the specifics of the RRSP and if you've finished lifting your jaw off the floor from what I've shared with you on the resp, you might as well keep your jaw dropped when you go through the rrsp. Now getting back to the RR esp, aside from the income taxes on the investment gains and the additional taxes on the 20%, the AIP can only be paid to the subscriber who is a Canadian resident and and if any one of the conditions apply, the plan has existed for 10 years and each individual who was the beneficiary has reached 21 years of age and is not eligible to receive the EAP. The plan existed for 26 years or all the beneficiaries under the plan are deceased. So again, any one of these criteria. So let's just illustrate what those options will look like using the Building upon the example that I shared with you earlier. So remember the example that I shared with you earlier where you have generally three RESP options and the unregistered option. Well, let's walk through each of those individual options. If your beneficiary decides not to go to post secondary education, here is what the consequences would look like. So just to recap, you've put in $42,000 before the compounded growth of the contributions of 3,000 grew to 61,736 after you've paid fees, the amount is actually total of $52,000. So after the fees, the real growth between the two is the 10,797. So that 10,797 you would actually need to repay the $7,000 from the C S G and you would also need to pay taxes on this 10,797 because that's the increase in how much you've earned for that money. And the taxes you would need to pay is basically a function of 30, 36%. Let's assume your marginal tax rate is 30%. Additional tax that comes from what I mentioned earlier is the 20%. Because of not attending you have to pay an additional 20%. So the effective increase in tax is 36%. And so again if your assumed tax rate is much higher, let's say in the 40 or 50%, this becomes even more penalizing. So you can see that this is the amount of taxes that you're going to pay on this base, which is $36,000. So ultimately if your child does not go to post secondary education under this route, you will lose Approximately at least $90. So it's about break even. Again, this is not including any transaction fees or anything that related to you using the self directed option. The next point I want to illustrate is what if you decided to go if your account was set up using the regular resp. So what would that look like? Well remember the amount that was under consideration in terms of the increase because of the fees. Again those fees have eroded the amount of your increase which is 3002 91. And on that 300291 you actually will have. And I'm just carrying this down just for you to see. And again, once your child decides not to pursue, then you will have to pay the $7,000 back to the Canadian government. But on top of that, this 3921 is going to be taxed at the same rate, the penalized rate, the AIP tax rate, which comes to 1185. And so for your child that decides not to pursue post secondary education in this example on a simplistic perspective, you're again losing about $5,000. Now let's walk through the option and show what it would look like if your child decides not to pursue under the group resp option. So under that option, again this very same contribution amount of $42,000 because of the all the fees, you generally may not come ahead. So in this example here, the amount that has basically happened was zero. And after it's zero, you have to still repay this $7,000. And not only that, I've just assumed the enrollment fees was two times the contribution amount that you put in, which is $5,000. I also remember if there was an amount earned in this group plan, you may end up forfeiting it. So again, I just use zero. But if there was money earned here, you would actually need to for you would actually end up forfeiting it. And on top of forfeiting it, you would probably need to pay taxes on that too. I mean, if it was not forfeited to you, you would need to pay taxes on it. So irrespective of of all of those nuances and variables, what I wanted to show you is that for you participating in these group resp plan, you can see you would end up paying, you could potentially pay, in this example, 12,000. Again, the dollars is not important. What's really important for you to take away is recognizing just the option of choosing the RSP will have severe consequences to you if your child decides not to pursue the post secondary education. If we look at the time that it took you to accumulate this money, 14 years, the money didn't actually go up at all. I didn't even include inflation. Could your money have produced a better outcome had it been put somewhere else? And the answer is absolutely. The other part, again just to take away for you to understand is along this journey that you were saving up for the resp. Everyone else got paid, the promoters and the trustees all got paid. The government receives their money back. If they don't go, you are the one left with an empty bank. And just for illustrative examples, I'm going to show the unregistered portion again. So this is one of those options. Well, you actually don't encounter any of this. So you still at least walk away with combining these two. 7006, 47. So you still come out ahead, but not as ahead as you probably would have liked. So what we went through was a lot of information and with all of the nuances you may have gotten confused along the way. So I want to encourage you to watch it again, especially to make sure, even at a slower rate, even just to make sure that you understand what has happened there. Now, if you've made it this far, I wanted to say congratulations on getting this far. The most important thing, if you haven't been lost in all of the details that I've gone through with you, is that the certainty of whether your child goes to post secondary education is completely unknown. The earlier you start saving for the plan and your child decides not to go that route, you actually end up receiving severe consequences and Penalties leading into the resp. You are the one carrying the risk and the consequences of whether or not the money grows. Because of the way the industry and products you purchase are structured, you end up paying an absorbent amount of fees. In the case of whether or not you make money or not, irrespective of that, they will get paid. When your child decides not to pursue post secondary education, the CESG must be paid back and this could mean taking away money from your contributions. If the value of the account that you had goes down, the money that was earned over the duration could be forfeited as a worst case scenario if you used a group resp. And the best case scenario, if you want to consider the best case scenario, is if the value of your account is more than what you've contributed, the excess from the income that's been increasing the money pool would be actually not would not be included at your marginal tax rate, but it would be included with a 20% tax penalty and that is levied on you by the government. If we look at all of the players and the roles in the resp equation, the government, the promoter and the trustee in this equation lost nothing and got paid. You took the risk and walked out with the empty bag in your hands. By now you've been able to see some of the considerations of the respond and depending on the route you choose, you would potentially be worse off compared to if you approach saving the money in a different way, like using a unregistered trading account. While an unregistered trading account may be another option to you, you are still dealing with other barriers and considerations like fees. And more importantly, you're the one still taking the risk on growing that pool of money. All that you've changed was the wrapping paper and the house that where you stored your money. Well, what if there was a stress free way of saving for education and it's not dependent on whether your child goes to post secondary education? What also may be important for you to know is the value of the money that you've put in can only go up if all you need to do is deposit your money in a different way. Could the outcomes be different? Well, there actually is a different way and it starts with learning about taking control of the banking function as it relates to your needs in this savings for education. Now, if it's not safe for education, it doesn't end there. It could be used for something in the future that your children may want. Whether it be buying a car, traveling abroad and gaining experience paying for weddings. You name it when your money is deposited as premiums into a properly designed participating whole life insurance policy, this can eliminate the risk from you growing your money. After you finish watching my video, make sure you visit watchibc.com to learn more about this process. Let me bring out a design on what that would actually look like. I want you to know that at any time, the money that you deposit into a properly designed participating whole life insurance policy, you are able to access it at any time. Whether or not you choose to do that, that's actually your choice. And when you do do that, you can actually deploy that money into investments to enhance your returns. Now, if you deploy that money into investments that can enhance your returns, you then put yourself in exposure of the markets going up and down. But aside from that, what I want you to know is you can access the money, deploy it into investments where it is going to be exposed to the up and downs based on your choosing. The money that's in your participating whole life insurance policy is still growing every single day. Irrespective of you using the money to put deploy into investments. Or if you don't use the money to deploy your investments, what you will see is a compounded growth of your money every single day with it just sitting there doing nothing, following the same contribution schedule. It is available to you when you need it. And while you most certainly can use the money to bring the additional returns, believe it or not, your cash values will still grow every single day. So let's dive into sowing that example in this case. So now you see the very same example that I'm going to do and I just hidden the values from the other options just to focus the information. Now if you can see here. Now if you were to use the infinite banking concept to help you save for your child's retirement, here's what that would look like. The first thing I want to make sure that you see is that this money is not being put into investments and it's not therefore exposed to the same fee structure. The second thing for you to recognize is that following the same pattern of you instead of investing in those various resp options or unregistered options, you're just taking the same $2,500 that you are able to contribute. And so the total contributions for the 14 years would be $35,000. Now, if you followed this plan based on an illustration that is provided when this is designed, the values approximate 42,000 46 8. Number one, there is very good clarity for you to know if you decide to Stick to this plan, what the possible outcomes will generally look like with a high probability. The second thing is you can see the net increase is about 7004,68. The next part I want you to recognize is when it comes to taxes, this has all increased without attracting any more tax. The other part I want you to recognize is you have not lost any money because of fees. And although you have not put this money into a registered education savings plan, you therefore will not be entitled to receive the csg. So if you look at the outcome of this example, you have still come out quite in a great place. I want to go back to revisit this. 42,468. This amount of money is contractually guaranteed. The money will never go down. It only goes up. It grows actually every single day uninterrupted. And this doesn't end when your child goes or does not go to education. This can continue on until age 100. You can decide to continue depositing 2500 every year. You can decide if you do not want to deposit 2500 every single year. And with the contractual guarantee of this money never going down, that grows every single day with it. Also looking at, without having the same rigidities of what we've talked about in terms of an respondent, you now have a choice in how you want to use that money. How is that for your money in terms of the decrease in stress and having the peace of mind. Let's dive into now revealing going back to the values related to the resp. So under the self directed options, the net fees that you're going to get is 52,797. If you're happy with your child managing the tax and tuition credits as it comes to the income that they're going to need to declare, by all means, that is up to you. If we look at the regular resp option, the value starts now, eroding close to the 42,000 because of those fees. Now if we also now look at the resp group option, it now becomes very close to the RESP group option without the same penalties that are going to come from that withdrawal. And now if we look at the final option of the unregistered, and it essentially is just in this example, about $200 off. And if we look at, in comparison, in all of the choices that you make, the choice that you're making here is very much similar, except how you went about doing it. You ultimately are trying to achieve the objective of saving for education, for your child. However, the outcome and the Attributes can actually vary very much differ. And what I mentioned earlier where even though this money is just sitting there and that can be used at any time for education, for purchasing a car, for anything along the journey that they're going to go through, this money can actually also be used to be put into an unregistered account. And, and, and you can put it into investments to also grow. And while that is also growing, this is also growing. So you have two assets growing for you for the price of one. And that is not even considered, I have not even considered what the outcome on the returns on that would be. And while this is just its own standalone value, with that $35,000, when it goes through into the banking policy first, you can actually access this money to also be used as an investment and put into a unregistered account to earn money there, or it can go down just like any investment. And while that is also doing that, you basically have two assets working for you and not one. You have the asset that is from the banking system, you have the asset that's coming from the investment. And this is all predicated on having your policy properly designed. The last thing I want to share with you is in a sense beyond the scope of what an respondent is, but I do believe it's relevant in terms of the application and the usage of the resp. As you can see, you will face particular challenges when your child decides to pursue a path outside of the mechanics and design of the resp. When it comes to the resp, the goal is to have your child pursue post secondary education in Canada. The consequences to you are quite severe. If they don't. Well, I'd like to share the consequences are equally severe if you do use an resp. Well, the cost of post secondary education, as I've shared with you, is quite high. And if the four year journey locally is at least $100,000, a standard estimate that you would need to save would be $50,000. Now the remaining $50,000, you now need to ask the question, where would that money come from? Most students end up using lines of credit and government loans like the Ontario Student Assistance Program. And what actually catches many parents and students by surprise is when they realize that the value that has been accumulated in your RESP can impact the amount of the loan you can actually get, especially when it comes from OSAP when it comes to matters. Talking about debt for education. That's not the topic of what I'm trying to discuss about right now. However, I will speak from my own personal experiences and circumstances during the time that I attended university, because of my circumstances, I was able to get most if not all of the funding from OSAP for my education as compared to my counterparts who, through parents who had contributed and built an resp, found themselves not getting enough OSAP funding. The situation is actually even worse if the student wasn't in the co op program to get a co op term where they could actually get employment to pay for their tuition. So they eventually had to work minimum wage jobs just to cover the shortfall for education. So imagine needing to also work a long amount of hours for a for a minimum wage while balancing your studies. In the case of osap, since the primary determinant for OSAP is actually based on income levels of family, including yourself, this means that the higher your RESP balance is and the more income as a family that is made, it is more likely that it will impact the amount of OSAP you can get. Even worse, it could even eliminate the chances of your child getting money from osap. Period. Unfortunately, if you don't report properly your resp the government has your SIN number and since the account is registered they are able to see exactly what's in your account. There are severe penalties for not reporting. Let me just show you a few examples of people's experiences. Irrespective of the period of time I will share with, I will make the connection that as an instructor at that university, this is the same experience that has not changed, which I don't think you would be surprised. Will OSAT reduce loans and grants bursaries if I told them I had an resp? Yes and yes and yes. The RESP is tied to you and traceable through SIN and bank information.
Not claiming RESP funds that you withdrew is fraud and they do persecute when they see fit. Yes, never lie to osap. They've chased me on simple things even when I made a statement that in the four months next four months I will be making less than 5,000 and ended up making a lot more because I have a full time job. They did not put me on probation but they will catch your lie because everything is in your SIN card. Here's a very nice comment that was put here. System is extremely broken. It punishes you for planning ahead and saving for education while it rewards the poor with interest free money. It's crazy how so many of my friends are not doing any work living off of OSAP and then plan to not pay the loan after. Again, when it comes to an OSAP loan, the structure of the loan is definitely different than what you normally are used to. And here's another experience that I want to share. I just learned an expensive lesson. Please take OSAP applications very seriously. I've had an RESP for my daughter and did not use in the first year, but did use it in the second year. Withdrew 20,000 which 17,600 was from the income grant portion. Bad advice from this bank rep, but that's another story. Well, after going through all of that, the 17,000 showed up on a T4A slip in my daughter's name. Sometime later in November 3rd of her third year, we got a letter from OSAP indicating that she has been suspended for OSAP for five years for underreporting income. But that would be re reported but that could re report the amount withdrawn from OSAP. Ultimately the lesson was it costed 1960 lost in grants and whatever interest they'll have to pay on the 18,000 in loans and now have to go onto his line of credit needlessly lost 30% in tuition grants which really hurt. Make sure the amounts when you apply for osap. Even if you think that they'll make much of a difference in your funding or you're feeling a little lazy like he was, their penalties are harsh and merciless. This is just some of the additional information I want to arm you with when you consider using the resp. If I can leave you with a thought. If the cost of education is $100,000, $50,000 came from your RESP and OSAP will fund $20,000. Where will the 30,000 come from? Well, when it comes to saving for education, this video was meant to give you a comprehensive understanding of the mechanics of the RESP in conjunction for its purpose of saving for education. If you're left frustrated and wondering what to do next, I've shown you a different way. And that way starts by taking control of the banking function in your life and building the banking system for your children's future. Not only does this navigate and avoid the myriad of confusions and severe penalties, if designed and structured properly and used properly under coaching, it can avoid risks of impacting your government loan funding like OSAP. This all starts with you taking control and visiting watchibc.com.
