In 2014 when our first child was born we opened an RESP account for them. We contributed $140/month. When our daughter was born we doubled this amount to $280/month and made it a joint account. The RESP program in Canada seems like a great idea because it matches up 20% of your contribution and allows the fund to grow tax free. However more and more these days, I am contemplating: do I need RESPs in 2017?
An RESP stands for a Registered Education Savings Program. It was established by the government of Canada as an investment vehicle for parents to save for their children’s tuition. The Canadian government matches 20% of the first $2,500 invested per child. So this could add up to $9,000 to your child’s fund by the time they are turn 18.
We have over $10,000 in this joint account now and our kids are just three and half and 18 months. It grows very quickly. As we discussed in our plan to FI, we never intended to pay for all our children’s tuition. Today, parents are always trying to be perfect and they think it makes them bad parents if they do not pay for their children’s entire education. D and I both paid for all our post secondary educations and it really made us value it more and gave us a huge head start in educating us on personal finance. We would like to have some savings to help them a little but ultimately make them accountable as well.
Introducing the New Ontario Tuition Grants
In 2016 the Ontario government announced a new a number of changes to the tuition assistance program to begin in the 2017/18 school year. These changes his were aimed at students of low income families. However it offers very generous programs for families making up to $70,000-$80,000 a year. In an update last week, the government announced that half of students from families earning $83,000 or less ending up collecting more money than they paid in tuition.
So essentially if your family income is less than $83,000, there are plenty of options out there for your children to qualify for free tuition. You would have to to look at all your options and hopefully choose a reasonably priced institution program.
So why do I need RESPs in 2017?
Although $83,000 is a lot less than what our current family income is, it is way more than we plan on making once we reach FI. We plan on spending less than $30,000 a year in FI. We will likely never make more than $50,000 even on our absolute best years. I don’t have any ethical problems with qualifying for these grants either. Like many people, I believe that post-secondary education should be subsidized and a universal service offered to our population. Our oldest won’t start university or college until 2032. It wouldn’t surprise me if it was free by then…
So do I need RESPs in 2017? My answer is NO. If an RESP goes unused, you forfeit the government grant portion and you have to pay taxes on any growth in the fund on top of an addition 20% penalty. It could also be transferred to RRSP (minus the government portion) however you have to have enough RRSP room. This is not an efficient way to use RRSP because all those years of gains count take up RRSP room (as opposed to a regular RRSP contribution, where your gains don’t take up allowable room).
This is obviously quite unique to the concept of going FI. Most families likely don’t anticipate making less in 18 years than they do now. But if you are on an FI path, I would highly recommend you analyze your income projections for the next 18 years and decide if an RESPare the right investment vehicle for you. If you have unused TFSA, then I would say, save some “in case” tuition money in that account instead. It will grow tax free no matter what and you will never face a withdrawal penalty.