RESP – Is it worth it?

I’m certain there is some sort of government mandate to make seemingly simple stuff as confusing as possible. The RESP (AKA – Money for your kids education) is no exception, it actually might be the rule.

I imagine the conversation at the CRA going down like this “Hey Joe, this new RESP program you drafted up is crap. I understood the whole thing, the first time, without needing a translator. Can you go ahead and make this thing a bit more complicated, bonus points if it requires an accountant, banker or lawyer to complete. Don’t screw it up this time – I mean make it completely incomprehensible.”

And then it was born the RESP – The Registered Education Savings Plan. The most complicated way of delivering an easy concept ever created. It’s just a savings account for your kids education that gets an automatic bonus of 20% and it’s called the RESP. I break the process down into five easy steps below:

  1. Open an RESP Account (Big5)
  2. Deposit Money (Child Benefit)
  3. Get Free Money From The Government (CESG)
  4. Purchase Low Cost Balanced Investment ETF (VBAL)
  5. Help Pay for Your Child’s Education

Step 1 – The RESP is not something that you buy, it’s something that you open. This is a common misconception for RRSP accounts as well. You open a Registered Education Savings Plan account and then you can deposit money into it.

The most cost effective way to manage an RESP is to open a self directed one with any of the BIG 5 banks. iTrade for instance has an easy to set up self directed RESP available. Be careful of the RESP vultures that hang around in the baby ward at the hospital. These plans usually have extremely high fees and limited investment options.

Step 2 – Deposit cash into the self directed RESP account that you just opened. To keep things simple you will need to invest $2,500/yr per child to receive your maximum grant of $500 (CESG – Canada Education Savings Grant). That is a 20% guaranteed return courtesy of the tax payer and if you pay taxes it’s really just a bit of your own money coming back to you. But you get the idea.

Step 3 – FREE MONEY! Everyone loves FREE Money! And everyone qualifies for the Canada Education Savings Grant (CESG). And if you live in BC (BCTESG) your little ones will get an additional $1,200 just for rotating around the sun six times. In Quebec (QESI) you will get an extra $250 per year and low income families may qualify for even more under the Canada Learning Bond (CLB). The maximum CESG grant is $7,200.

Step 4 – Once your cash and the government grants have been deposited into your RESP account you have officially won parenthood – Congratulations!

The next step is to purchase a low cost balanced investment ETF. A good choice is Vanguard. They make a couple of easy to understand low cost options. VBAL or VGRO would be both great choices for an RESP. These can be easily purchased in your self direct RESP account that you opened in Step 1.

Step 5 – When little Johnny is ready to pursue higher education you are now prepared to assist. The RESP can be used for a range of different programs offered by a wide selection of schools and institutions. A lot of people assume that an RESP has to be full-time university or college but that is not the case it can also be used for part-time schooling, certificate programs and trade schools.

“Thanks for all the info MoneyRunner but how do I get the $2,500/yr to invest in a RESP?” Easy answer is the government gives that to you too. If you and your squeeze are making $65K household, and you have two children the child benefit ($7,170.12/yr) alone will cover your RESP investment. This leaves you with over $2,000/yr to pay for sports activities, school fees or extra beer. You can check out the calculator here.

Not only do you get FREE MONEY! But in essence the government is fully funding your children’s education.

What happens if your little shits kids don’t pursue higher education? No worries – Mom and Dad can convert the RESP to their RRSP to be used later for fancy holidays to Mexico. But if you still have hope, you can also leave the plan open for a maximum of 36 years. Lot’s of time to get them out of the basement.

So is the RESP worth it? Is a $500/yr grant per kid worth it? Is letting your cash grow tax deferred worth it? Is helping to ensure the future success of your spawn worth it? I’ll answer that for you – Yes!

For more information regarding the RESP (Registered Education Savings Plan) account and the CESG (Canada Education Savings Grant) visit the CanLearn website here. Or comment below. Remember it’s not complicated – See Step 1.

Author: The Money Runner

Husband, father, runner, personal finance enthusiast and computer geek. Thanks for visiting. Please check out my other posts and follow me on Twitter and Facebook.

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13 Comments

  1. What do you think about the family plan? Is it better to open an individual? Thanks for the info.

    Post a Reply
    • Good question. I didn’t really touch on this in the article but that’s exactly how I have set up the RESP for my kids. It makes sense as you can pool the money without having to transfer between accounts at withdrawal time. You can name multiple beneficiaries and you only have to manage one account. Thanks for the comment. I might write a follow up article to explain this in more detail.

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  2. Good way the look at it. If you do it right all Canadian children get a free eduaction. Right on.

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  3. They used to have a special creidt for albertans too. My kids missed it by a year. Woe is me. Any thoughts on the tfsa?

    Post a Reply
    • Sask used to have a special credit too. Not sure why AB and Sask scrapped their program. Oh Well. Take advantage of the CESG while it’s still available. I wrote a blog post on the TFSA – you can check it out here.

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  4. Great a post. Just the motovation I needed to get my ass in gear. I’m going to get this started.

    Post a Reply
    • Awesome. You have just won the parenthood award. Thanks for reading and leaving a comment. Good luck with the RESP.

      Post a Reply
  5. Why Cap I at $2,500?

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    • The only reason to cap at $2,500 is to maximize the CESG contribution. You can contribute more up to a lifetime maximum of $50,000. Thanks for stopping by and thanks for the second comment. Keep on runnin’

      Post a Reply
      • When our first child was born, we transferred $5K right away.

        Then on his birthday, we transfer $3K and will continue to do so until he turns 15.

        Total contribution: $50,000
        CESG: $7,200 (maxed out way before the final $3K)
        Total expect balance: $100,000+ when he is 18.

        We use TD e-series mutual funds, which are the least expensive index-based mutual funds on the market.

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