Showing posts with label RESP. Show all posts
Showing posts with label RESP. Show all posts

Tuesday, April 15, 2008

the smart R.E.S.P.

The Canadian government's Registered Education Savings Plan (R.E.S.P.) program is a great way for parents to save for a child's education. When used intelligently, the plan can really allow parents to give their child significant funds for their education while outlaying very little of their own money.

What do I mean by this? There are several ways to use the plan intelligently, but by 'used intelligently' I am referring to 2 practices in particular:

Invest fully, EARLY
Utilize the Universal Child Care Benefit (UCCB) and the Canadian Tax Benefit (if applicable)

By following these 2 simple tips, funding your desired portion of your child's education will be a breeze....much easier than first year chemistry anyway... Here's an example. Let's take two sets of parents, we'll call them the 'Smiths' and the 'Einsteins'.

On April 15, 2008 the Smiths gave birth to a bouncing baby boy named Darryl. But there were planes to catch and bills to pay, so the Smiths put off starting a nest egg for Darryl's education until 2020 when he was 12 years old. At that time they began putting in the maximum amount per year ($2,500) in order to still receive the 20% CESG grant ($500) that the government provides. The Smiths also did not use the $100 / month, that the government of Canada dolls out until the child is age 6 in the form of the UCCB, they hardly even noticed it....

Amount of their own money invested by the Smiths = $15,000
Amount Available for Darryl's Education in 2026 = $23,416
On the same day the Einsteins gave birth to a baby girl named Cheryl. Knowing the power of compounding, the theory of relativity, as well as the benefits of living below your means, the Einsteins began investing the $2,500 annually in the first year of Cheryl's life. Not only did they take this wise route but they also took the UCCB amount of $100 per month and used this as part of their $2,500 per year. The Einsteins had the Government of Canada giving them money upon money by having them match the UCCB to the tune of 20%. When Cheryl turned 6 Albert and his wife abruptly stopped all contributions.

Amount of their own money invested by the Einsteins = $7,800
Amount Available for Cheryl's Education in 2026 = $58,965

Both families invested for 6 years, but because the Einsteins invested early and utilized the monthly UCCB they were able to provide over $58,000 vs. the Smith's $23,416. The Einsteins pulled this off using half the funds that the Smiths used.

*rate of return used was 8%, assumed deposits made a beginning of each year.

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Saturday, March 8, 2008

resp in net worth, the decision

This is a fairly long post, but if you track net worth and plan to have children, or have children already you might be interested in reading on...

Recently I've pondered and posed this question to readers:
Do I include our RESP balance as part of our net worth?

Thanks for all the great comments on this. The verdict is certainly still out on whether or not one should include the balance. Commenter's were split on the issue. Here are some of the points that were raised:

The 'Against' Case:
Scott noted:
The intention of the savings plan is to fund your child's education and as such it is his asset. If the funds eventually are rolled into your own RSP's due to them not being used for education it should be considered a windfall because that's really what it is. It was never part of your intended asset base.

Luc-Roc said:
However, you could always create a separate "Family Net Worth" report and add your RESP in that report.

Dividends4Life commented:
One differences though is that my plan under U.S. law is irrevocable - it is theirs at age 18.

Middle Class Millionaire suggested:
However, other than to satisfy the technical definition of networth I don’t think there is really any benefit of including it. When using networth to gauge your progress you’ll probably subtract it why include it?

The 'For' Case:
Sarlock explained:
Whether I had an RESP or not, I would be funding a significant portion of my daughter's post-secondary education and this would be part of my annual expenses during those years. The fact that I am putting away money now toward this future expense just means that I am allowing myself 18 years to spread this expense out instead of having to incur it at the time which would have a much heavier impact on my savings when those days arrive. Thus, I have included it in my personal net worth computations - with a caveat. I have only included the amount that I have put in to her account, not the amount the governments have contributed nor any amount of growth.

pitz said:
RESP is an asset that, in bankruptcy, is the property of *your* estate. So its yours, if the creditors come a'calling

DH noted:
I have and believe as above that i will be helping fund the education and this is just keeping future dollars in my pocket. It is an asset after all? Do you take out your wife's RRSP because it has her name on it and is technically hers if she leaves you? Besides its money you can remove in a worst case scenario if needed (I personally know people who've done this!)

Q from Surrey, BC commented:
I have also included RESP in my networth because it is my money being saved up. Networth is an indication of how you are doing so its unfair to leave the RESP amount out.

I can't emphasize enough how insightful these comments were, and how much they aided me in making my decision. Before I posted about this I really had no idea whether I was going to include it or not. I have decided now after reading these comments and thinking more about it that I am going to include any RESP balances in our net worth. I think at the end of the day you have to think about the RESP as a gift. A good analogy is the following:

Imagine you planned on buying a car for your son for graduating university. When your son is 16 years old you begin to save money in an investment account for the car. When completing your net worth statement a few years later when you have accumulated $12,000, do you include the money? I would say the answer is a resounding 'Yes'. Just because an asset is intended to by used for a purpose in the future that involves it leaving your hands, doesn't mean the asset didn't exist in the first place. Points readers raised about the fact that if we did not save the money now for the education help, I would be likely shelling it out in the future which would take away from our net worth growth at that time, were good ones.

A few caveats:
  • I won't include any government CESG grants, because they were never our money and never could be our money in the future.
  • I will include any market gains that the money garners.
  • I will mentally deal with the huge reduction in net worth at the time our son begins school, by considering the fact that we had always decided to help with the education, and we could have done it at the last minute, which would have reduced our net worth by an equivalent amount. Hopefully by the time this all transpires, our net worth will be relatively large, and the lost money will not be significant.
  • A positive I see with including the balance, is the fact that money we contribute to the account will not only help our son someday, but it helps and encourages our net worth and financial progress now.

Monday, March 3, 2008

resp as part of net worth

Since I have recently opened a Registered Education Savings Plan (RESP) for our son, a conundrum has occurred to me;

Do I include the RESP balance as part of our Net Worth?

Points To Include Our RESP Balance As Part of Our Net Worth
  • The funds are technically ours (we have complete control over them)
  • If our son does not attend school, the money becomes ours if we choose
  • I hate to see money leave our net worth that has technically been saved, and not really spent on anything, (well anything yet....)
  • If our son does not attend school, it may become our money and will appear onto our net worth one day. If we failed to include it until this point this would look like a windfall. This will throw off my tracking and performance reviews.

Points To Not Include Our RESP Balance As Part of Our Net Worth

  • The funds are theoretically someone else's money (our son's)
  • When our son attends school, which he is very likely to do, the money goes away
  • I would hate to add money to our net worth over the next 20 years that will likely not be ours
  • If our son attends school, it becomes his money and if included, will drop from our net worth one day. This will throw off my tracking and performance reviews.
  • The CESG's (Canadian Government Grant's) sole beneficiary is our son.

What do you think?

Saturday, March 1, 2008

the seeds of an education

This week I started a Registered Education Savings Plan for my 6 week old son.

For some great information on RESPs, you should visit Canadian Capitalist or Quest for Four Pillars. These two authors provide some of the best, most thorough information on Canadian RESPs available on the Internet today. All the great information contained on these two blogs really helped me with my RESP choices and with the process itself. 

How The Process Worked For Me
I filled out a TD Mutual Funds RESP application that I obtained online and mailed it in to their Markham office. Within the application I included a form that needs to be filled out in order to immediately covert the account to an e-series account. 'E-series' simply refers to a group of index funds that can be purchased online. The low management needs of these funds, combined with the efficiencies of using the Internet allow these funds to carry some very low MERs (Management Expense Ratios). MERs are the hidden fees that an investor pays for the administration of a mutual fund, ETF, or index fund. Also included in our application was our application to receive the CESG grant, which allows the government to match 20% of our contributions.

The account was set up very quickly, and TD notified me by email. The email prompted me to call TD Investment Services where I was advised that I needed an access card to get onto their online EasyWeb system. EasyWeb allows the investor to manage the entire RESP account online. I went into a TD Canada Trust branch and obtained the access card. Now that I have the card I am able to access EasyWeb, where I have switched out of the TD Canadian Money Market fund where I deposited my cash initially. I put the cash in the money market fund just to allow the funds to be held for a brief time before I decided where to transfer it for long term growth.

Why I Chose TD E-Series Funds
The merits of index investing as a way to replicate market returns for minimal cost are widely known. What I like about index funds aside from the low MERs is the fact that they are great to use for taking a no-hassle approach to investing. For this RESP account my priorities were minimal management on my part, low fees, and long term growth. I believe the following allocation, which I have chosen satisfies this:

TD Canadian Index E-Series -----MER=0.31%------30% allocation
TD U.S. Index E-Series-----------MER=0.33%------35% allocation
TD International Index E-Series--MER=0.48%------35% allocation

I plan to re-balance this infrequently if the asset allocation gets too far out of line. Obviously as we get closer to our son's first day of post secondary education the money will need to be managed more for stability of capital rather than for growth, and I'll adjust accordingly. That is a long time off right now as currently we are trying to get him to keep a soother in his mouth.

Monday, February 11, 2008

february links and updates

  • I wrote a guest post for The Dividend Guy. Check out What Makes A Stock Defensive? The Ultimate Defensive Stock. at The Dividend Guy.
  • My non-registered portfolio is yielding a staggering 4.5%, and is actually down 8.1% year to date while the S&P 500 is down 8.8% in 2008.
  • Great Scott! Financial Jungle interviews one of my dividend investing mentors.
  • So far we've saved over $600 in February for our non-registered portfolio, which puts us over 60% of the way toward our monthly goal.
  • I am also opening an Registered Education Savings Plan (RESP) account, with TD e-series funds for my son. The little fella is going to own some Index Funds before he can hold his head up...