Saving for School with the RESP…….Are You Too Cool?

If you are diligent and max out your child’s Registered Education Savings Plan contribution limit, you likely dump $2500 into their plan every year. It’s also likely that you are in the minority as far as taking advantage of this program.

Everyone’s cash flow is finite, and decisions need to be made. The RESP may be regarded as that extra expense which is just too hard to absorb after Vancouver mortgage payments, RRSP’s, TFSA’s and funding your rockstar lifestyle. Others may feel the $2500 sum is too insignificant to move the needle on what may be a $100K+ expense, and it’s not worth the time.

Here’s the reality, in wealth management there is a quiver of activities which we want to embrace whenever the chance presents itself:

  1. With respect to our savings we want to compound our faces off vigorously over long periods of time, and ideally without sharing the fruits of our labor with the government (who is already well funded by our consumption, income and wealth creation efforts).
  2. We want to capture any dollar earmarked for Ottawa which we could otherwise re-route (within the laws of the land) back to fund meaningful expenses such as post-secondary education, rather than throwing money at say…..a phantom pipeline or a bizarre PM boondoggle to India.
  3. Income splitting: the math is just so much better if we can spread income out over multiple family members and pay an average rate of tax that is lower, than if all the income is taxed in one family member’s hands at a rate in the stratosphere.
  4. We appreciate that our cash outlay for a future expense can be much lower if we use time to our advantage and have compound interest do the heavy lifting. Tiny effort over a long period of time rather than a more expensive effort cramming the night before. Smart, and easy to comprehend…yet, human nature can be a cruel joke sometimes as our subconscious searches for ways to do anything but play the cost effective long game.

The RESP checks all of the above boxes. Basically, the financial equivalent of sucking back an acai smoothie while writing an entry in your gratitude journal, all while hammering in a spin class. You always knew you were an overachiever.

  • If you have two kids, you have $14,400 of government grant money available for the taking. Think of it as getting a rebate back on your income tax paid from years past.
  • Your money can grow tax sheltered – no sharesy’s with the CRA….kind of like those ballers in the movies who park their dough in the Caymans.
  • Finally, you can income split the RESP withdrawals with your 18 year old whose tax rate is lower than yours, and by that I mean likely 0% (unless they made serious coin at their summer job, in which case it’s probably a better call to punt school and just keep on keepin’ on).

Some of my biggest clients have always maintained a disproportionately high degree of interest in their family’s RESP, even though it represents a tiny slice of their portfolio. That said, they are large clients for a reason…probably one of which being a sixth sense drawing them to free government grant money, income splitting and tax free compounding of their capital whenever it has been offered.