Clever ways to maximize your RESPs

According to Statistics Canada, the average Canadian University student spends just over 6,500$ a year on tuition alone. On top of that students have to think about textbooks, transportation and other materials, and, for those who decide to study abroad, daily-living expenses increase the cost of studying even more.

Many Canadian parents open a Registered Education Savings Plan (RESP) in order to save money, while benefiting from grants (minimum 20% of parental contributions; varies according to household income) given from the Canadian Government, for their children’s’ education. While this saving tool is the best to save for one’s child’s future studies, most Canadians don’t benefit from it as much as they can.

In fact, according to Statistics Canada, the average Canadian parent only contributes 1,507$ a year per child, which is just over 50% of the 2,500$ yearly grantable contribution room. Since the minimum base is of 20% of parental contributions, this means that the average Canadian parent is missing out on just under 200$ (198.60$) in grants every year. If the RESP was started at the child’s birth, this translates close to 3,400$ (3,376.20$) in unused grants per child.

Of course, not every parent can afford to put aside 2,500$ a year (or 208.33$ a month) per child, but there are ways to attain more grants without touching one’s budget. The following are three tips parents can use in order to do just that.

 

  1. Going to Have Extra Money? Great! Force Yourself to Save! Take a slice of that extra cash and put it into RESPs with pre-authorized debit from your bank.

 

Although this might seem like the most basic idea, we tend to have difficulties disciplining ourselves to save. Whether we are expecting a salary increase, a tax return, or a lowered expense (e.g. no more car payments), our first reaction is usually ‘’great! I have more budget to spend’’, especially once the money is in our checking account. This is why it is important to take ‘’savings’’ measures before the money is in the checking account, like pre-authorized debit transactions. This will ensure that the money is taken from the account as it goes in; it creates a forced act of saving. For example, if one expects a salary increases of 100$ a month and wants to increase one’s savings habits by 50$ a month, one should ask their financial institution to increase their pre-authorized debit transactions by 50$ a month. It is also important to ask the financial institution to do the increase ahead of time in order to ensure that the saving increase starts at the same time as the salary increase. If that 50$ saving is placed into an RESP, it translates into an extra 10$ a month in grants minimum. Thus it does pay off to put some of that extra money into RESP’s.

  1. It’s For Their Future, Why Don’t The Kids Contribute? Let them use RESPs as a piggy bank that keeps on giving!

Of course kids can’t contribute into RESP’s themselves, nor do most make any money for at least the first 15 years of their lives, without it being allowance. However, it might not be a crazy idea to teach kids about saving at a young age. Surely a 5 year-old kid won’t be thinking ‘’I want to put my money aside for school’’, but teaching children at a young age to save for that one big toy they want will start good saving habits for them. This can later translate into them wanting to save for their post-secondary studies when they are working part-time while in high school. In this case, children can give that ‘’savings’’ money to their parents to put it into their RESPs and gain more than if the money goes into a piggy bank or a typical savings account.

A practical solution for parents could be to encourage their 16 year-old to give them 50$ after every pay to put it into the child’s RESP. In the end, building saving habits for kids is healthy and when they start working part-time, instead of using it all for their own amusement, they can also contribute into their own RESPs.

 

  1. Take an RESP Loan. Take the loan when your child is close to finishing high school and profit from the favourable ROI.

A loan? This might seem like a scary or crazy idea, but taking an RESP loan can actually allow parents to benefit from governmental grants at the maximum that they can, without affecting their budget. However not all companies do this, thus it would be important to check with your financial institution if they do. It is important to note that an RESP loan is not the same thing as a regular loan, where monthly payments will be required. The RESP loan allows parents to take a loan matching their accumulated contributions to a minimum of 500$ to a maximum of 5,000$ a year. The loan does not have to be reimbursed until the child goes to post-secondary school, meaning that no payments have to be made before then, thus no effect to the monthly budget, and more governmental grants received. To make this more concrete, here is an example:

Mike is now 14 years old and his parents have now contributed 5,000$ into his RESP account and they currently contribute 500$ a year into Mike’s RESP. They decide to take am RESP loan for 2,000$, which will give them 400$ of governmental grants. When Mike goes to university, the lender will take back their 2,000$ (plus interest) and Mike will get the 400$ (plus interests made on the 2,000$ loan and the grants).

Of course, with every loan comes an interest rate. A typical rate would be 3.95%, but paying 3.95% for at least an immediate 20% return from the governmental grant (plus the interests gained on the loan and the grants) is not a bad deal. However, it is important to note that it is best to take such loan when the child is getting closer to post-secondary school in order to avoid the compound interest effect. Again, let’s take the same example as before:

 Mike’s RESP tends to have an average interest rate of return of 2%. Meaning that after 3 years (if Mike goes to post-secondary school following the year he turned 17 years of age), the 2,400$ placed in his RESP (from the loan and the grants) will be equivalent to 2,546.90$, and his parents would have paid 246.48$ in interests. This means that Mike’s parents payed 246.48$, in order to add 546.90$ for Mike’s studies, a total profit of 300.32$.

 

Resources

Employment and Social Development Canada. (2016). Average annual Registered Education Savings Plan (RESP) contributions by province and territory (in dollars).       http://open.canada.ca/data/en/dataset/bf6cc0ab-b8c0-48fc-aedb-83e24e4f2c99, last visited on December 1, 2017.

Statistics Canada. (2017). Tuition fees for degree programs, 2017/2018. https://www.statcan.gc.ca/daily-quotidien/170906/dq170906b-eng.htm, last visited December 1, 2017.

Industrial Alliance and Financial Services. (2017). How does the RESP work? http://ia.ca/how-does-the-            resp-work, last visited on December 1, 2017.

Industrial Alliance and Financial Services. (2017). RESP loan. http://ia.ca/resp-loan, last visited on  December 1, 2017.

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