Building a registered education savings plan to help pay the cost of college or university for your children is just basic investing. Keep costs low, diversify and ratchet down the risk level as your child gets close to graduating from high school.
Using a RESP to cover tuition and living costs is trickier. There’s no manual on how to do it, which means parents sometimes learn by trial and error. Now’s a good time to review RESP withdrawal strategies because the federal government announced some changes for these plans in this week’s budget.
From the point of view of withdrawals, money in an RESP is divided into two categories. One is the Educational Assistance Payment, or EAP, which represents investment earnings and money added to the RESP through the federal Canada Education Savings Grant. The CESG offers a matching grant of 20 per cent on RESP contributions of up to $2,500 per year, to a maximum of $7,200. The other type of withdrawal from an RESP is the post-secondary education withdrawal, or PSE, which is simply the money contributed to the plan.
TFSA, RRSP or RESP: How to choose where to invest your money
RESP 101: How to use a RESP to save for your child's education
For students and parents, the big difference between EAP and PSE withdrawals is tax-related. EAP money is considered income in the hands of the student beneficiary and taxed accordingly, while PSE withdrawals are not taxable because they’re a return of contributions.
The budget raises the amount of EAP that can be withdrawn from an RESP in the first 13 weeks of enrolment in a full-time program to $8,000 from $5,000. Parents, it’s a good idea to take full advantage of this when structuring RESP withdrawals to cover a child’s first year of post-secondary education.
The reason is that it’s unlikely kids aged 18 or 19 will make enough in total income for the year to owe any taxes, even with an EAP added to the mix. Ideally, the amount of RESP money available for EAPs is down to zero by the time your child is landing a better class of summer job and possibly working at it part-time through the year. These higher-earning years are the time to make RESP withdrawals through the non-taxable PSE route.
Before making RESP withdrawals, ask the investment company you work with to provide a breakdown of money available for EAPs and PSEs. With this in hand, you can give instructions for each withdrawal on the mix of EAP and PSE you want. The budget’s increase in the EAP limit is a reminder of the importance of managing these withdrawals to ease a potential tax burden on your kids.
Your thoughts on student debt
Student debt is a flash point in the U.S. as the Supreme Court decides the legality of President Joe Biden’s plan to forgive up to US$20,000 in debt for up to 40 million Americans. The Stress Test personal finance podcast wants to check in with what’s happening with student debt north of the border. How has student debt shaped your life and your spending? If you’d like to share your story on Stress Test, please e-mail firstname.lastname@example.org
Subscribe to Carrick on Money
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob’s personal finance reading list
Real estate and the ‘ick’ factor
Real estate agents list five turnoffs about a home for sale, including wide-angle photos that make a property look bigger than it is.
A ‘Target meets IKEA vibe’
The Zellers retail name has been revived in pop-up mini stores that are opening in some locations of The Bay. Here’s a detailed report on the ambience, pricing and variety of merchandise on sale. Interesting note: Prices are rounded to the nearest dollar, so no $1.99 and such.
Why are they rioting in France?
I’ve been looking for an explanation like this for the violent – literally – opposition to the French government’s plan to raise the age for starting a retirement pension to 64 from 62. Aging populations and longer lifespans mean governments are going to have to find a way to fund retirement benefits.
Where the bus is a bargain
A comparison of public transportation costs in cities around the world, including Toronto.
Q: I have a registered retirement savings plan with a bank. My question is, would it be better to have an RRSP with another type of financial institution besides a bank to improve my RRSP portfolio?
A: The real question here is how good the returns from that bank RRSP have been. Go to the person at the bank that sold you the funds and ask for information on how its returns compare against other products in the same category. Or, research the fund online. Worry less about the past year and more about three-, five- and 10-year returns. Are you in line with the average or better, or is your RRSP consistently underperforming? If your returns are disappointing, then your options include finding an adviser to take over your portfolio, using a robo-adviser or managing the portfolio yourself at a digital broker.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
Need help building a low-cost portfolio of index-tracking exchange-traded funds? Try the model portfolios listed on the Canadian Couch Potato blog.
The money-free zone
The baseball season begins Thursday for the Toronto Blue Jays. Scheduled to take the mound on for the Jays on opening day was Alek Manoah, a great young pitcher who was recently featured in a Toronto Life profile. Worth a read even if you’re not a baseball fan.
From the Twitterverse
A funny exchange on being young and furnishing your apartment with ugly furniture.
- From flood insurance to alcohol taxes, how the 2023 budget affects Canadians’ wallets
- Five job mistakes anyone early in their career can learn from
- It’s no time to lock in a mortgage rate, but if you want to, here are four things to consider
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF buyer's guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who's best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where’s the happiness? • Who should and shouldn’t worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don’t make this potentially costly assumption about the CPP Survivor’s pension