Author Topic: RESP Asset Allocation over time.  (Read 3352 times)

FIRE_at_45

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RESP Asset Allocation over time.
« on: January 20, 2018, 12:46:06 PM »
This post is copied from my journal to reach more smart people ;)

RESP Asset Allocation

I dumped some money into the kid's RESP at the turn of the year and now I need to invest it.  I prepared a plan for a sliding asset allocation for each year that passes and they get closer to school.  I am interested in learning how others are planning their AA related to their children's ages and withdrawal timing.

So, here is the plan for this year (7 years until 1st year university)



Every year that passes I plan to decrease International, Canadian Equity and US Equity and increase the bond component by 5% to reach a maximum of 35% bonds by the time first year hits.  After that time I have no clear plan.  I'm assuming that they will withdraw it in equal amounts each year but I don't know that for a fact. 



^Performance since inception of their RESP from TD WebBroker.   

At that time anything could be happening with the markets and they will be as unpredictable as always.  My thinking with the 35% at withdrawal time is to allow them to take out 1 full year without worrying about the market.  During that year, assuming it's terrible, I guess we could decide if and when to move the rest. 

Am I being too conservative?  Maybe I should let the money 'run' until about 2 or 3 years before the start of school and then make these changes.

Thoughts?



^^CCP Recommendations for AA by age, courtesy of the article linked below.

http://canadiancouchpotato.com/2010/11/05/taking-risk-in-an-resp/

^Edit: And I found this from the Canadian Couch Potato suggesting I'm already far too aggressive.

RichMoose

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Re: RESP Asset Allocation over time.
« Reply #1 on: January 20, 2018, 09:53:30 PM »
It's easy for most to delay retirement due to an overly aggressive portfolio that went through a downturn at the wrong time. I certainly wouldn't want to be the one to tell a kid they have to delay university because I invested too aggressively hoping they would have a bit more.

50/50 would be my go-to I think. You would sacrifice about 1-1.5% CAGR for a whole lot more stability. It would be a different story if your kids were 18 yrs away from uni...

FIRE_at_45

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Re: RESP Asset Allocation over time.
« Reply #2 on: January 21, 2018, 11:47:49 AM »
It's easy for most to delay retirement due to an overly aggressive portfolio that went through a downturn at the wrong time. I certainly wouldn't want to be the one to tell a kid they have to delay university because I invested too aggressively hoping they would have a bit more.

50/50 would be my go-to I think. You would sacrifice about 1-1.5% CAGR for a whole lot more stability. It would be a different story if your kids were 18 yrs away from uni...

Do you think 50-50 right now 7 years away? 

daverobev

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Re: RESP Asset Allocation over time.
« Reply #3 on: January 21, 2018, 12:00:18 PM »
I was thinking I'd start with bonds at roughly age 10 = 10%, and increase by 10% each year.

I'm guessing they won't need all the cash for university anyway. IF we do just over $2k a year that we're doing, I'm guessing there will be far too much money in there... So it'll go for a house downpayment or something.

FIRE_at_45

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Re: RESP Asset Allocation over time.
« Reply #4 on: January 21, 2018, 12:10:03 PM »
I was thinking I'd start with bonds at roughly age 10 = 10%, and increase by 10% each year.

I'm guessing they won't need all the cash for university anyway. IF we do just over $2k a year that we're doing, I'm guessing there will be far too much money in there... So it'll go for a house downpayment or something.

Are you contributing enough to maximize the government contributions?  I agree if they live at home you can actually accumulate more than they need.

daverobev

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Re: RESP Asset Allocation over time.
« Reply #5 on: January 21, 2018, 04:25:22 PM »
I was thinking I'd start with bonds at roughly age 10 = 10%, and increase by 10% each year.

I'm guessing they won't need all the cash for university anyway. IF we do just over $2k a year that we're doing, I'm guessing there will be far too much money in there... So it'll go for a house downpayment or something.

Are you contributing enough to maximize the government contributions?  I agree if they live at home you can actually accumulate more than they need.

Yeah, the max grant is $7200, $400 (ie we put in $2k) a year = 18. We're doing a little more than that. Should be done by the time they are 16 or so.

RichMoose

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Re: RESP Asset Allocation over time.
« Reply #6 on: January 21, 2018, 08:48:07 PM »
It's easy for most to delay retirement due to an overly aggressive portfolio that went through a downturn at the wrong time. I certainly wouldn't want to be the one to tell a kid they have to delay university because I invested too aggressively hoping they would have a bit more.

50/50 would be my go-to I think. You would sacrifice about 1-1.5% CAGR for a whole lot more stability. It would be a different story if your kids were 18 yrs away from uni...

Do you think 50-50 right now 7 years away?
Yes, here's why. If you are 100% stocks you can expect a 40-50% drawdown to occur. That means the market has to climb 100% to break even. That can take years to happen: 5.5 yrs after 2007, 6 yrs after 2000.
However, a 50/50 portfolio was whole in half that time with a drawdown less than half the size. It was pulling far ahead before the all stock portfolio was even back to pre-drawdown levels.
Both are not adjusted for inflation, an issue in education especially.

With a retirement portfolio, you are looking at a 40+ year drawdown timeline with a 4% withdrawal rate. In education savings you have a 4-8 year drawdown window with a 10-25% withdrawal rate. Given the drawdown intensity, a stock heavy portfolio just not worth the excess risk for the possibility of them entering school a tiny bit better off.

FIRE_at_45

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Re: RESP Asset Allocation over time.
« Reply #7 on: January 21, 2018, 09:22:05 PM »
Yes, here's why. If you are 100% stocks you can expect a 40-50% drawdown to occur. That means the market has to climb 100% to break even. That can take years to happen: 5.5 yrs after 2007, 6 yrs after 2000.
However, a 50/50 portfolio was whole in half that time with a drawdown less than half the size. It was pulling far ahead before the all stock portfolio was even back to pre-drawdown levels.
Both are not adjusted for inflation, an issue in education especially.

With a retirement portfolio, you are looking at a 40+ year drawdown timeline with a 4% withdrawal rate. In education savings you have a 4-8 year drawdown window with a 10-25% withdrawal rate. Given the drawdown intensity, a stock heavy portfolio just not worth the excess risk for the possibility of them entering school a tiny bit better off.

That's a pretty compelling argument @Mr Rich Moose!  You are too young to remember those two corrections but it's part of the reason I got discouraged with investing.  I find it funny here with some young folks who have been super fortunate with the run up of both real estate and the market.  I digress.

I think I should reconsider how aggressive I'm being. 

Below I've included a brilliant comment in my journal from @Goldielocks.  I am divorced and and trying to work amicably with my children's mother on our RESP contributions.  We invested about $10,000 together that is growing in some account she set up.  It's written into our agreement that we jointly contributed and will get the money if the kids don't use it.  Anyhow, it's become a challenge to even know the AA allocation so I don't sweat it.  I've since set up an RESP and she has as well.  We are both contributing separately.  We have no plans to max out the government matching because we simply didn't want to help that much but then I read this from @Goldielocks and I'm considering this strategy down the road.

Quote

RESP

Fire @45, I had the same thought as you.  We planned to save $25k per kid (plus inflation) for their university.   It is turning out to be plenty and then some if they live at home.  I had thought we were done, then realized that the un-used remaining grant money was a waste.. of a 10% to 20% instant, guaranteed return.. so.  When they are 15 or 16, look to max out your last 2 years for the grant money. Age 17 is the final year.  Note, put this in a NEW RESP that you set up with your name as sole contributor only.   When they get into university, withdraw it all their first year (second term, if needed), and they keep the grant money, and you reclaim your original investment.   This is allowed (your contributions are never considered to be the kids' money unless you say so when it is removed).    I put in $20k into the RESP our final 2 years, to get that extra $4k in grant money for the kids, and it is a great deal.     

By this token, if you are down to the final $4k of grant money not claimed, wait until the final 2 years and max it out (age 16/17).   Leave it invested in something else that benefits you before then.  A couple of years of tax free growth is not a lot versus increased liquidity for you to use it as you like.

Also, Fire@45...  if you have a joint RESP with your ex, you need to stop contributing to it, and start contributing to one in your name only... unless you have something on the record that specifically prohibits her from withdrawing the  RESP funds without your sign off.   The named contributors can withdraw all the original contributions at any time, just like a joint account, which you don't want to have happen.   
« Last Edit: January 21, 2018, 09:26:06 PM by FIRE_at_45 »

Prairie Stash

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Re: RESP Asset Allocation over time.
« Reply #8 on: January 22, 2018, 08:20:43 AM »
I'll offer some other parts to consider. Definitely agree on the separate from the ex-spouse RESP accounts though that Goldielocks suggested.

As RichMoose points out the draw down timeline is short. However, if its a family plan the timeline is from when the first starts to when the last ends. I have two kids, the drawdown extends for 7 years, assuming both attend university. If you have a 2,6 and 10 year old, the math is quite different. Lets assume its not a wide age spread, follow the more conservative approach then.

Next question, will your kids work and save some for their own education? I plan on my kids saving $5000 each for their own education during high school (at a minimum wage of $15 that's 334 hours pf work over two years at McDonalds, 14 hours a month). They can kick that over and have $6000 cash, not bonds or stocks, for their respective first year. To prepare I'm leaving some of the $7200 grant room open for them. Did you plan on the $6000/kid of cash in your AA?For my kids its probably going to be $9000, I might get them to save $7500 each since I expect in 15 years that minimum wage will be $20/hour and it won't be that hard for them to manage (16 hours of paid work a month). I think a small amount of part time work is healthy for a child, its a valuable part of their education prior to University.

Will you be FIRE by then? I will be and my kids will qualify for student loans. Canada loans are interest free during school, so you can get them if the market sucks and then pay them off with the RESP when the market rebounds. This is the backup plan, its good to have backups. If you're not FIRE, you may be expected to contribute to their education, in that case the RESP is a good way to avoid larger bills later.

Most people struggle with the thought of their kids contributing to part of the education. Do you think its reasonable to have the kids contribute? If so what would be a reasonable amount of hours? I think its best thought of as hours worked, you wouldn't want them working 30 hours/week but what do you think is a reasonable amount of hours to work/year while finishing school? Maybe they can work extra during the summer, that's up to you to decide.

RichMoose

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Re: RESP Asset Allocation over time.
« Reply #9 on: January 22, 2018, 10:00:24 AM »
Next question, will your kids work and save some for their own education? I plan on my kids saving $5000 each for their own education during high school (at a minimum wage of $15 that's 334 hours pf work over two years at McDonalds, 14 hours a month). They can kick that over and have $6000 cash, not bonds or stocks, for their respective first year. To prepare I'm leaving some of the $7200 grant room open for them. Did you plan on the $6000/kid of cash in your AA?For my kids its probably going to be $9000, I might get them to save $7500 each since I expect in 15 years that minimum wage will be $20/hour and it won't be that hard for them to manage (16 hours of paid work a month). I think a small amount of part time work is healthy for a child, its a valuable part of their education prior to University.

Will you be FIRE by then? I will be and my kids will qualify for student loans. Canada loans are interest free during school, so you can get them if the market sucks and then pay them off with the RESP when the market rebounds. This is the backup plan, its good to have backups. If you're not FIRE, you may be expected to contribute to their education, in that case the RESP is a good way to avoid larger bills later.

Most people struggle with the thought of their kids contributing to part of the education. Do you think its reasonable to have the kids contribute? If so what would be a reasonable amount of hours? I think its best thought of as hours worked, you wouldn't want them working 30 hours/week but what do you think is a reasonable amount of hours to work/year while finishing school? Maybe they can work extra during the summer, that's up to you to decide.
I'm not at the stage of planning RESPs and child education... yet. But I think these are very important ideas.

I paid for 100% of my own school and paid my parents room and board while in school (big family, not wealthy). My wife got a one-time payment to cover about 2 years of education (tuition & books) and we paid the rest ourselves. Should kids get their entire education funded by parents? I don't know... it certainly wasn't our experience.

We currently don't have any kids, but should the time come to make these decisions I am a fan of some sort of matching program while they are in their mid-teens. You put $1 in your RESP, I put $1 in your RESP. Same goes for other savings.

Get a part time job and learn some life skills like responsibility, the value of money, getting out of bed on time, showing up to work on time, listening to someone who's not a parent or restricted to "soft-ism" behaviour (teachers). I don't think anyone is advocating some kind of child slave labour situation, but an after school / weekend job 3 days a week never hurt anyone.

FIRE_at_45

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Re: RESP Asset Allocation over time.
« Reply #10 on: January 23, 2018, 08:55:05 PM »
I'll offer some other parts to consider. Definitely agree on the separate from the ex-spouse RESP accounts though that Goldielocks suggested.

As RichMoose points out the draw down timeline is short. However, if its a family plan the timeline is from when the first starts to when the last ends. I have two kids, the drawdown extends for 7 years, assuming both attend university. If you have a 2,6 and 10 year old, the math is quite different. Lets assume its not a wide age spread, follow the more conservative approach then.

Next question, will your kids work and save some for their own education? I plan on my kids saving $5000 each for their own education during high school (at a minimum wage of $15 that's 334 hours pf work over two years at McDonalds, 14 hours a month). They can kick that over and have $6000 cash, not bonds or stocks, for their respective first year. To prepare I'm leaving some of the $7200 grant room open for them. Did you plan on the $6000/kid of cash in your AA?For my kids its probably going to be $9000, I might get them to save $7500 each since I expect in 15 years that minimum wage will be $20/hour and it won't be that hard for them to manage (16 hours of paid work a month). I think a small amount of part time work is healthy for a child, its a valuable part of their education prior to University.

Will you be FIRE by then? I will be and my kids will qualify for student loans. Canada loans are interest free during school, so you can get them if the market sucks and then pay them off with the RESP when the market rebounds. This is the backup plan, its good to have backups. If you're not FIRE, you may be expected to contribute to their education, in that case the RESP is a good way to avoid larger bills later.

Most people struggle with the thought of their kids contributing to part of the education. Do you think its reasonable to have the kids contribute? If so what would be a reasonable amount of hours? I think its best thought of as hours worked, you wouldn't want them working 30 hours/week but what do you think is a reasonable amount of hours to work/year while finishing school? Maybe they can work extra during the summer, that's up to you to decide.

Agreed, if you have children who are different ages to stretch your withdrawal period your strategy can be different from mine with twins. 

Yes, I think that kids earning money and learning life skills is critical.  I started working summer jobs at 12 YO and worked all the way through university.  My parents did help me at about a rate of 30-40%.  My ex and I have sort of agreed to support them to 50% and they are on the hook for the rest.  I have done the math and expect them to work every summer through university.

Yes, I will be FIRE and student loans are a real possibility and even some with some forgiveness (i.e. no payback).  I am not looking into this now because it is too far off to worry about right now. 

joonifloofeefloo

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Re: RESP Asset Allocation over time.
« Reply #11 on: January 25, 2018, 05:25:58 AM »
I was surprised by the CCP recommendation! Appreciated seeing that.

I'm 100% stocks in my kid's, even though he could be in uni in five years. This is because I don't plan on him using it right out of high school. We're in it for the grants and bonds, hope his schooling will be covered by other means (study grants, his own savings), and aim to ultimately roll the money over into another product. If we do use it for school (including renting a room at home if that's a permitted use), we'll use it at the account's optimal time, vs according to calendar dates.

K-ice

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Re: RESP Asset Allocation over time.
« Reply #12 on: January 26, 2018, 04:18:05 PM »
Thanks for posting the CCP stuff. I am currently 80/20 and will keep it this way until the kid is 10yold.

Also, I am learning, the:

Quote
you reclaim your original investment.   This is allowed (your contributions are never considered to be the kids' money unless you say so when it is removed). 


was new information for me.

For tax implications, can the child claim the grant and the interest and the original parent take back the original investment/book value?

I'm not sure I will apply this but it is interesting.



daverobev

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Re: RESP Asset Allocation over time.
« Reply #13 on: January 27, 2018, 01:03:57 PM »
Thanks for posting the CCP stuff. I am currently 80/20 and will keep it this way until the kid is 10yold.

Also, I am learning, the:

Quote
you reclaim your original investment.   This is allowed (your contributions are never considered to be the kids' money unless you say so when it is removed). 


was new information for me.

For tax implications, can the child claim the grant and the interest and the original parent take back the original investment/book value?

I'm not sure I will apply this but it is interesting.

AFAIK the grant and all growth (divis, cap gains) are taxed in the child's name. The rest - the $ you put in - is just money; there is no taxation due, so it doesn't even matter whose money it 'is' (it is the contributor's, but as there is no tax on gifts you can do as you will with it).

Pretty cool.

Prairie Stash

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Re: RESP Asset Allocation over time.
« Reply #14 on: January 29, 2018, 09:19:17 AM »
Thanks for posting the CCP stuff. I am currently 80/20 and will keep it this way until the kid is 10yold.

Also, I am learning, the:

Quote
you reclaim your original investment.   This is allowed (your contributions are never considered to be the kids' money unless you say so when it is removed). 


was new information for me.

For tax implications, can the child claim the grant and the interest and the original parent take back the original investment/book value?

I'm not sure I will apply this but it is interesting.

AFAIK the grant and all growth (divis, cap gains) are taxed in the child's name. The rest - the $ you put in - is just money; there is no taxation due, so it doesn't even matter whose money it 'is' (it is the contributor's, but as there is no tax on gifts you can do as you will with it).

Pretty cool.
.
1. Whoís in Control of the RESP Account?
The money (or assets of any kind) in an RESP account is controlled solely by the subscriber. This means that only the person who sets up the RESP is allowed to request payments from the account Ė not the student. All withdrawals of original contributions can be sent to either the subscriber or beneficiary (student), while grant, bond and accumulated income (see #4 for more details) can only be sent to the beneficiary.

http://www.rbcroyalbank.com/student-solution/articles/6-common-questions-about-withdrawing-money-from-an-resp-answered.html

Original Contributions are tax free - can be kept by parent (spend it on renovating the kids room)
All the other money in the account is taxed in the child's name, must be given to child.

Prairie Stash

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Re: RESP Asset Allocation over time.
« Reply #15 on: January 29, 2018, 09:32:25 AM »
Contributions and grants - Catch up model

Everyone knows that you can get $7200 in grants. What is confusing is that you can get all of it in 8 years, even though the RESP rules say its a max of $500/year. You are allowed to do Catch up ($5000 total/year) to get $1000/year in grants. I did this with a retroactive provincial grant (it was weird getting 2013 grants in 2016).

Lets pretend your kid is 9 when you start an RESP. You contribute $5000/year for 7 years, $35,000 total and $1000 the last year for the remaining $200 grant. You will receive the full $7,200. In year 1 (2018) you get the back room for 2017 and the current 2018. In 2019, you get the 2019 and 2016. The catch up years aren't just the sole previous year, its any year since the child was born (similar to RRSP rules).

Then your kids goes to school, you can withdraw all $36000 you put in and put it into your own accounts. The grants and growth ($7200+growth) belongs to the child and is taxed in their hands. Good or bad, its a strategy. As far as I can tell, 100% allowed.

Edit: If you contribute $10k this year, you can't claim it for next years contribution. Smart money is there's still a cap at $5000 to get max grant, if claiming retroactive room. You can't just stick $36,000 in all at once to get all the grants.
« Last Edit: January 29, 2018, 09:40:01 AM by Prairie Stash »

FIRE_at_45

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Re: RESP Asset Allocation over time.
« Reply #16 on: January 29, 2018, 06:59:20 PM »
Does anyone know if you can get a report from the government on what you've contributed in you children's RESP?  I ask because I'm divorced.  We contributed together for 1 joint account.  And now we are both contributing separately so the kids will essentially have 3 different accounts.  It's become quite confusing to know where we are with the grants and reading @Goldielocks post on this subject and what you've written @Prairie Stash I want to maximize the free money.

Edit: I should add that my ex-wife controls the joint account and her account.  We communicate but let's just say it isn't perfect.  I know we could just go back to the respective institutions and get them to tell us but that might be a challenge for me.
« Last Edit: January 29, 2018, 07:01:35 PM by FIRE_at_45 »

Prairie Stash

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Re: RESP Asset Allocation over time.
« Reply #17 on: January 30, 2018, 09:59:10 AM »
Does anyone know if you can get a report from the government on what you've contributed in you children's RESP?  I ask because I'm divorced.  We contributed together for 1 joint account.  And now we are both contributing separately so the kids will essentially have 3 different accounts.  It's become quite confusing to know where we are with the grants and reading @Goldielocks post on this subject and what you've written @Prairie Stash I want to maximize the free money.

Edit: I should add that my ex-wife controls the joint account and her account.  We communicate but let's just say it isn't perfect.  I know we could just go back to the respective institutions and get them to tell us but that might be a challenge for me.
Eventually I expect it will be rolled into the CRA my account page in the child section (benefits and Credits tab). Until then, its a mess if there's breakdown in communications.  If you set up your RESP at the same institution it may be easier to manage, they can tell you when the limit is reached (legally required to). If you mess her up on monthly deposits by putting in  a large lump sum she will be mad, just like you would be. If its really acrimonious right now, a short break won't hurt anything. Whatever you do, tell your ex in writing, to ease the problem both ways. Unfortunately, make sure your decision is sustainable because it will become expected to be continued until the child turns 18. If you ever lower your amounts it will be a jerk move.

"RESP promoters are required to ensure that contributions do not exceed these annual and lifetime limits. See 3. Contributions and contribution limits.

However, an overcontribution can occur when several subscribers contribute to different RESPs for the same beneficiary without coordinating their contributions. For more information about overcontributions and taxation, contact the CRA at 1-800-267-3100."

The other option is CESP at
1 800 O Canada (1-800-622-6232)
The Canada Education Savings Program
Employment and Social Development Canada
140 Promenade du Portage, Phase IV
Mailstop: Bag 4
Gatineau, Quebec
K1A 0J9

daverobev

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Re: RESP Asset Allocation over time.
« Reply #18 on: January 30, 2018, 10:05:25 AM »
How do people feel about Real Return bonds as a 'very safe' way of investing?

Eg, BMO have ZRR.TO as an ETF.

biggrey

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Re: RESP Asset Allocation over time.
« Reply #19 on: January 31, 2018, 12:42:38 PM »
With one in university and the other on the cusp, I have now gone 100% fixed income.  I did full contributions (almost $50K each), got full grants, and got growth from capital gains and dividends over the years.  I have now paid for several years of university for the older kid.  I locked the remaining $150K balance in to a fixed income product with a very reliable return history. 

The short time frame argument I had with myself and my wife about 3 months ago convinced me to take this money out of the game entirely and simply not worry about it anymore.  It is for the kids, I don't consider it in my own allocation thinking, whether it goes entirely for their schooling or just gets boiled out and provided to them to kick-start some other aspect of their young adult lives in or after school.
« Last Edit: January 31, 2018, 12:47:00 PM by biggrey »

Prairie Stash

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Re: RESP Asset Allocation over time.
« Reply #20 on: January 31, 2018, 01:36:34 PM »
With one in university and the other on the cusp, I have now gone 100% fixed income.  I did full contributions (almost $50K each), got full grants, and got growth from capital gains and dividends over the years.  I have now paid for several years of university for the older kid.  I locked the remaining $150K balance in to a fixed income product with a very reliable return history. 

The short time frame argument I had with myself and my wife about 3 months ago convinced me to take this money out of the game entirely and simply not worry about it anymore.  It is for the kids, I don't consider it in my own allocation thinking, whether it goes entirely for their schooling or just gets boiled out and provided to them to kick-start some other aspect of their young adult lives in or after school.
Fascinating, very few people on these boards are in the take out phase of the RESP, I have questions. How much, based on the current child's expenses to date, do you think each child will need for their degree? That sounds like a very large balance, far more than I plan on, I'm curious if there's any reason for me to reconsider my approach and go bigger. In fairness, my children will live at home for University (at least two years), that reduces monetary costs considerably, not everyone has that option.

If you expect there to be extra, based on the previous question, why not roll the excess into their TFSA now? Is there any draw back to funding the TFSA while in school?

biggrey

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Re: RESP Asset Allocation over time.
« Reply #21 on: January 31, 2018, 01:56:33 PM »
With one in university and the other on the cusp, I have now gone 100% fixed income.  I did full contributions (almost $50K each), got full grants, and got growth from capital gains and dividends over the years.  I have now paid for several years of university for the older kid.  I locked the remaining $150K balance in to a fixed income product with a very reliable return history. 

The short time frame argument I had with myself and my wife about 3 months ago convinced me to take this money out of the game entirely and simply not worry about it anymore.  It is for the kids, I don't consider it in my own allocation thinking, whether it goes entirely for their schooling or just gets boiled out and provided to them to kick-start some other aspect of their young adult lives in or after school.
Fascinating, very few people on these boards are in the take out phase of the RESP, I have questions. How much, based on the current child's expenses to date, do you think each child will need for their degree? That sounds like a very large balance, far more than I plan on, I'm curious if there's any reason for me to reconsider my approach and go bigger. In fairness, my children will live at home for University (at least two years), that reduces monetary costs considerably, not everyone has that option.

If you expect there to be extra, based on the previous question, why not roll the excess into their TFSA now? Is there any draw back to funding the TFSA while in school?

Great questions, I'll try to tackle them.  #1 is home-town based and #2 will likely be away.  This kept the burn rate down for kid #1, retaining more for both of them as it plays out.  With our particular split, the total might end up in the range of $150K for 10 years of schooling and expenses.

I always considered the total fund to be seed money for them to use entirely or partially for school.  Since I'm knowledgeable, I will craft the best exit strategy for the different pools of money to ensure they get the maximum benefits from it and we collectively pay the least possible levels of tax.  Since the kids' university time overlaps, we have some level of flexibility to organize this. 

In general, I am going to work the gains/grants taxable component down as quickly possible, optimally taxed in their hands.  If we do it right, by the end, this should leave us with only original contributions left which can be taken up to to or even after the #2 finishes school, with no tax implications for anyone.

#1 already has a fully funded TFSA.  #2 isn't eligible quite yet but soon.  I'll continue funding those separately from the RESP.  But I agree with your point that remaining RESP money could go to that cause as well when the time comes. 

Circling back to the total amounts needed, it really depends now on #2's plan, so the terminal RESP balance may not be that significant but it will have gone to the intended cause, so that's fine.
« Last Edit: January 31, 2018, 02:00:03 PM by biggrey »

ms

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Re: RESP Asset Allocation over time.
« Reply #22 on: February 08, 2018, 12:53:59 PM »
My child is finishing her last year at a university in Northern Ontario. She's living on campus in residence and has stayed there all four years of her degree which required that we purchase a meal plan (though we went with the "lite" plan which was the cheapest option).

I had only saved 27k in total when she had started university. Luckily the first year she was eligible for some grants/student loans of about 10k and so the first year we withdrew the initial 5k and then waited until the second semester before withdrawing a few more grand.  The idea was to take out the part of the RESP that was taxable to her first as she didn't have much income from working the summer.

One year up there costs about 18k as it's engineering, so that and books.  She has a kitchen in her residence and so she does purchase groceries through the year.

Second year was easy, we just took out what was needed.  By third year, the money was almost gone.  She did work each summer but she's brought in less than 3k each summer.

Fourth year has been a bit frustrating to me as again she only worked her summer job for a few months which left her short for paying the last of her studies. So the last ~10k has come directly from my savings.

Overall, my experience with the RESP has been positive.  She paid minimal taxes on the grant/growth portion - I'd say maybe $200 the first year because we took out a little too much in combination of her grant and summer job. But the subsequent years she hasn't paid any taxes so the govt grant has been basically free money.

What did I learn? 

1. I invested with a financial advisor and it was in mutual funds which had high fees and not much growth.  So going forward I'm with Questrade and in an ETF in the total stock market (VFV.TO).

2. I didn't contribute enough for the first child.  For the second one, I've done the 2500 each year so far and gotten the grant.  I think I'd like to see the RESP fund to have at least 50k. 

3. I had emphasized good grades over jobs and so somehow that message got across as I'm paying for your education vs you are expected to contribute to your education. So that's something I'd like to change in the future.

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Re: RESP Asset Allocation over time.
« Reply #23 on: February 08, 2018, 01:32:09 PM »
^Thanks for sharing your experience with the cost to live away from him.  I had estimated $20 k per year which Iím adjusting 2% for every hear to account for inflation.  Our goal was to pay half and they are on the hook for the rest.  Iím sure there will be other options of loans and grants.  Personally though Iíve always felt that you have to earn your way too but thatís just my personal opinion and the way I choose to parent.

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Re: RESP Asset Allocation over time.
« Reply #24 on: February 08, 2018, 02:00:03 PM »
^Thanks for sharing your experience with the cost to live away from him.  I had estimated $20 k per year which Iím adjusting 2% for every hear to account for inflation.  Our goal was to pay half and they are on the hook for the rest.  Iím sure there will be other options of loans and grants.  Personally though Iíve always felt that you have to earn your way too but thatís just my personal opinion and the way I choose to parent.

For us, living at home wasn't really an option unless she chose a college vs a university. We did a spreadsheet of tuition, residence, fees, etc for the three universities that she was looking at (all away) and then basically chose the university that was most cost effective. She chose mechanical engineering and was looking at Sudbury, London and Kingston as options. So for each one, I did columns for Year 1, Year 2, etc with a space for summer earnings, some tutoring income. But in the end, Sudbury came out to about 60k, London was going to be 80k and Kingston just a bit higher.  Toronto was out of the question due to much higher tuition fees but also greater competition to get in. If she was able to get into Toronto, it would have been for something like science and the campus would have been in Scarborough and so she'd either be travelling clear across the city anyhow or living on campus/off-campus.

Based on that, and the money available, we made the choice.

I really like the "you pay half" strategy and I'm going to try to get something similar in place for the second one.  We still have years to go at this point as she's only 3.

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Re: RESP Asset Allocation over time.
« Reply #25 on: February 08, 2018, 02:16:20 PM »
Second year was easy, we just took out what was needed.  By third year, the money was almost gone.  She did work each summer but she's brought in less than 3k each summer.

Something seems funny with that.

I worked full time jobs temping in factories making 8$, and made more than that each summer.  It was hard, mind-numbing physical work on the night shift which is why it carried a premium over the 6$ and change that was minimum wage at the time.  Eventually I paid for a pest control technician's license and became an exterminator for 13$ an hour plus a company vehicle.  These jobs were full time.

Summer is four months.  You start lining up a summer job before your semester is up, so shouldn't really lose too much of the summer to downtime.  Minimum wage in Ontario is currently 14.00$ an hour at the moment.  A 40 hours a week for the summer should bring in about 9 grand.  I feel like your daughter should be able to do much better than this with a little help.

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Re: RESP Asset Allocation over time.
« Reply #26 on: February 08, 2018, 02:24:25 PM »
^I have done similar math and hence the you pay half.  There is no reason to finish university with any debt when you have parents contributing a portion. 

Iím surprised there was such a cost difference between cities but itís great you looked at this angle.  I went to university in Ontario so Iím familiar with all those cities.  Had several friends and relatives at Queens who lived off campus in the Ďghettoí and that was cost effective.  London is also fairly reasonable for living off campus...at least I thought. 

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Re: RESP Asset Allocation over time.
« Reply #27 on: February 08, 2018, 02:40:41 PM »
Second year was easy, we just took out what was needed.  By third year, the money was almost gone.  She did work each summer but she's brought in less than 3k each summer.

Something seems funny with that.

I worked full time jobs temping in factories making 8$, and made more than that each summer.  It was hard, mind-numbing physical work on the night shift which is why it carried a premium over the 6$ and change that was minimum wage at the time.  Eventually I paid for a pest control technician's license and became an exterminator for 13$ an hour plus a company vehicle.  These jobs were full time.

Summer is four months.  You start lining up a summer job before your semester is up, so shouldn't really lose too much of the summer to downtime.  Minimum wage in Ontario is currently 14.00$ an hour at the moment.  A 40 hours a week for the summer should bring in about 9 grand.  I feel like your daughter should be able to do much better than this with a little help.

She's mine and I love her but one word "procrastination". I hounded this child to look for a job back in February and she made a half-ass effort but no results.  In May, she "rested" and in June she thought about getting organized. In the end she ended up doing the same job she did the year before, which was part-time coaching for July and August. 

So yes, it could have been a lot more.  It should have been.

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Re: RESP Asset Allocation over time.
« Reply #28 on: February 15, 2018, 06:21:21 PM »
I am teaching a night seminar on this topic (saving and spending for kids education) next week..   sorry if this gets to be too long.

Asset allocation

% Fixed income (bond ETF funds in my case)

6 years ahead -- 30%
year ahead / first withdrawal  70%
Second term withdrawal , 1st year, today:  planned to drop back to 60% 
BUT -- markets change. I went to sell off the next wave of $'s , intending to sell off from bond funds as planned, but I was so happy with the market performance in January that I sold equities instead.   Then, at the end of January I sold the second round I wanted as cash from equities as well, when the market first dropped about 1%.   

So I am now at 90%+ Fixed income /bond funds.

University Costs


University costs are a bit less than some of the advertised costs that include full books and medical insurance.  Ontario is $2k more per year for a degree than BC or Alberta (Science / Arts / Engineering).   Business school is expensive everywhere as are international policy, some of the environmental policy type degrees that are new.

BC put a cap of tuition increases to 2% (adjusted each year) quite a few years ago, which keeps our costs lower than Ontario.  Ontario has more money for grants (free money) when someone receives a student loan than in BC.  (but  for income qualified persons only, of course).

Today's cost for school in BC:
Live away from home -- plan for $16k to $18k per year.  Does not include flights or starbucks. Includes tuition, books, meals, accomodation in a dorm residence, often a private room.   Making your own meals is about $2k cheaper for the mature students.

Live at home is much lower, about $5200/year for a college (KPU, Langara, Douglas is the cheapest btw), and $6500 for a science or engineering program at UBC, including some (not all) books, fees, Upass, lab fees etc.

I have saved up $25k for each kid (adjusting for inflation they will get a bit more by the end date).  If they want to live away from home their ability to get a job should cover a couple of years of living away.   I live in (long) driving distance to a few choices here, I don't live rurally.

Like another said, you can take back your contributions, and that is our plan we are working out now. 
By over funding the RESP (I mean, over funding it more than the $25k per kid), it has generated tax-free growth and the CESG money.  70% of the money I am giving the kids comes from the growth / CESG, and 30% is from our pockets (around $7500 each).

The way we are doing this:  In the first year, we are withdrawing all $25k for our DD, but as all AIP (growth or income) / CESG taxed in her name.  Because it is a family plan, some of that AIP could have been allocated to our son, who is younger, but it is better to empty the AIP (accumulated income and CESG) as much as allowed as early as possible, because in the unlikely event it is not used for education, it is subject to taxes (and the CESG portion goes back to the government).

I am keeping the rest of the contributions in there to earn more income, tax deferred basis.  I may take our "over contributions" out to invest in the TFSA's this year.

Interesting fact -- whenever you ask for a withdrawal of AIP in excess of $5k, you will need to provide proof that at least 1 term of school has been completed (transcript in addition to the record of enrollment letter).  Even if you have prior documentation on file and their form did not mention it.  It's a government thing that bit my butt this week causing more paperwork to resubmit on our end.


I love the comment about getting kids to work jobs.  Man, I am trying, I really am.  DD took a 7 week apprenticeship training last summer (for painter's apprentice), I ask now and then,  and I previously helped her submit an application to Home Depot, bring her places and point out the jobs she could work at, etc.   

If an older teenager does not pick up on the need to GET A JOB, even if they have no money other than the bare minimum (provided by me) to pay for school costs while living at home, it is so very hard to force them to do it.   ARGH!!!   She is so frugal, but would rather study, stay at home, and go to school ONLY, and wear thrift clothing than get a very easy job.    At least she started to babysit.    ANY TAKERS ON HOW TO GET KIDS TO GET A JOB?


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Re: RESP Asset Allocation over time.
« Reply #29 on: February 15, 2018, 06:40:11 PM »
...it is so very hard to force them to do it.

Totally!

My kid is definitely on his own track, and my internal response to other people's ideas is something like, "...can't physically force a teen to do stuff, like, it's not even legal to do so, man." I suspect he'll aim for the easiest, lightest track and will remain the natural consumer he seems to be. But, I know adults who live exactly that way -doing only what they experience as fun- and getting by just fine. Savings? No. But a career nonetheless, joy, and companionship. (I only *wish* I would do as well as them!)

I've worked hard from childhood, and have the savings to show for it, but that's about it. Not sure I could sell that path, lol.

She is so frugal, but would rather study, stay at home, and go to school ONLY, and wear thrift clothing than get a very easy job.

Gosh, she sounds great!! And isn't school her job? If she attends pretty much daily, studies, cooperates with that system, etc, I would call it that.

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Re: RESP Asset Allocation over time.
« Reply #30 on: February 15, 2018, 08:43:13 PM »
IDK.   My philosophy is that by the time you graduate, you need to have both a degree (or diploma or technical skills) and work experience.   Work experience starts with a "punch the clock" job, and may migrate to more business environment jobs or career related experience.

To me, these are equally important... or maybe the work experience is slightly more important.    I will have failed as a mom if she does not have work experience, health, a drivers license, and some sort of schooling (full degree not required but something focused) by the time she is 22.

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Re: RESP Asset Allocation over time.
« Reply #31 on: February 15, 2018, 08:59:48 PM »
I'm a huge fan of work experience -I would definitely want to see that in my kid, and I see no reason why he would not have that. All the adults I mentioned above have plenty of work experience. But if done responsibly (a.k.a. not the way I did it as a teen), school counts as a job in my books.

I will have failed as a mom if she does not have work experience, health, a drivers license, and some sort of schooling (full degree not required but something focused) by the time she is 22.

Oy! I sure hope my mom doesn't feel that way :)   She had heaps of kids, all had plenty of work experience by then, and all but one (me) had graduated high school, but few had a college degree or driver's license. She produced teachers (yep!), writers, social workers...

She absolutely didn't fail as a mom -quite the opposite. We all had different paths, and we've all been solidly good and (except one person in one matter) responsible people all the way through.

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Re: RESP Asset Allocation over time.
« Reply #32 on: February 15, 2018, 09:16:48 PM »
If an older teenager does not pick up on the need to GET A JOB, even if they have no money other than the bare minimum (provided by me) to pay for school costs while living at home, it is so very hard to force them to do it.   ARGH!!!   She is so frugal, but would rather study, stay at home, and go to school ONLY, and wear thrift clothing than get a very easy job.    At least she started to babysit.    ANY TAKERS ON HOW TO GET KIDS TO GET A JOB?

As a not too long ago young person, I'd react to being offered a scale of money in exchange for high marks, or else having to suck it up and make my own money.
I.E. All A = 100$ week (example) All B (50) All C (25) Ds (0).

The rest would have to come from working on my own. Substitute whatever numbers seems reasonable.

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Re: RESP Asset Allocation over time.
« Reply #33 on: February 15, 2018, 10:05:19 PM »
Ben -- you don't get it.  I have paid for her tuition, books, supplies and fees but not fun money, nor living away from home.  I did give her a 4 month lump sum of her allowance (which was only $45 per month) to pay her up through her 18th birthday.

She has been living off of her prior allowance savings, Christmas money from grandparents, and maybe $120 in earned babysitting money for the past 4 months.   I don't want to give her any more money, I want her to find the urge to make her own money.

Her marks are great, and she got a couple scholarships, but that is put away in a separate savings account (in her name) for future years....   Maybe it is know that she has $$'s just waiting for her that is demotivating?  iDK.

Great marks get family dinners out, not cash in our house, but DH grew up with $'s for A's too.

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Re: RESP Asset Allocation over time.
« Reply #34 on: February 16, 2018, 05:29:56 AM »
I indeed am confused, but I went into the military to skip the working while in school portion, so that just might be my background!

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Re: RESP Asset Allocation over time.
« Reply #35 on: February 16, 2018, 07:48:23 AM »
Second year was easy, we just took out what was needed.  By third year, the money was almost gone.  She did work each summer but she's brought in less than 3k each summer.

Something seems funny with that.

I worked full time jobs temping in factories making 8$, and made more than that each summer.  It was hard, mind-numbing physical work on the night shift which is why it carried a premium over the 6$ and change that was minimum wage at the time.  Eventually I paid for a pest control technician's license and became an exterminator for 13$ an hour plus a company vehicle.  These jobs were full time.

Summer is four months.  You start lining up a summer job before your semester is up, so shouldn't really lose too much of the summer to downtime.  Minimum wage in Ontario is currently 14.00$ an hour at the moment.  A 40 hours a week for the summer should bring in about 9 grand.  I feel like your daughter should be able to do much better than this with a little help.

She's mine and I love her but one word "procrastination". I hounded this child to look for a job back in February and she made a half-ass effort but no results.  In May, she "rested" and in June she thought about getting organized. In the end she ended up doing the same job she did the year before, which was part-time coaching for July and August. 

So yes, it could have been a lot more.  It should have been.

When I came back home from university I started paying rent.  As a favour to me, while working during the summer my parents would suspend rent payments.  Maybe try something similar.  I never would have bothered finding a job if I had a cozy house, people buying me food, and all the free time I wanted.

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Re: RESP Asset Allocation over time.
« Reply #36 on: February 16, 2018, 08:53:22 AM »
Ben -- you don't get it.  I have paid for her tuition, books, supplies and fees but not fun money, nor living away from home.  I did give her a 4 month lump sum of her allowance (which was only $45 per month) to pay her up through her 18th birthday.

She has been living off of her prior allowance savings, Christmas money from grandparents, and maybe $120 in earned babysitting money for the past 4 months.   I don't want to give her any more money, I want her to find the urge to make her own money.

Her marks are great, and she got a couple scholarships, but that is put away in a separate savings account (in her name) for future years....   Maybe it is know that she has $$'s just waiting for her that is demotivating?  iDK.

Great marks get family dinners out, not cash in our house, but DH grew up with $'s for A's too.
It could be perspective. When everything is already paid for $45 is a large sum. From your side of paying $30-40K/year, its a drop in the bucket. Ditto the scholarships, compared to your stash its not much. From her side, its more than the combined total of all the money she's ever earned! Imagine if you had a similar situation, how rich you would feel (when your total expenses are also already paid).

If she's feeling rich, why would she want to work? If you feel rich enough, you would retire too (me too, that's what FIRE is for).

In order to get someone to work you need to decrease their comfort. Cell phones get transferred and billed to their name, it build up credit and teaches responsibility but also drains their cash reserves (or it gets cut). Clothes and shoes get used up, that will start being horrible one day, but not for awhile, how will she replace them? Next trip you take she stays behind to house sit, unless she picks up part of the tab ($500 or something). I bet she also got nice Christmas presents from you, on top of the $45 allowance, probably something she really wanted, maybe next year she gets a study guide for math to help her do better at school (I love study guides, they worked for me).

I'm not advocating kicking her out, just a small decrease in the quality of life she currently has. You have to decide the appropriate amount. Not so far that she resents you, but far enough that a summer job looks good.

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Re: RESP Asset Allocation over time.
« Reply #37 on: February 16, 2018, 11:22:31 PM »
I like the way you think.   Did I mention that her phone, clothing (other than gifts), and other expenses (you want to make chocolate chip cookies?  can you give me $8 to buy the chocolate chips for you?).. all come out of her $45 per month....!   She even pays for her copays out of her school fund. She's also still only 17, and we are responsible for her technically until 19 here.

hmm  maybe i will just revel in the fact that she is frugal for now...

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Re: RESP Asset Allocation over time.
« Reply #38 on: February 16, 2018, 11:32:16 PM »
hmm  maybe i will just revel in the fact that she is frugal for now...

It really is pretty freakin' awesome!! She's already more financially skilled than most "successful" people manage to become! A solid life skill that will serve her well when she does take on a second job.

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Re: RESP Asset Allocation over time.
« Reply #39 on: February 17, 2018, 11:43:37 AM »
Great discussion to catch up on.
My biggest mistake off the get go was taking a capital payment rather than the AIP which draws down the grants instead. Initially I took the capital but clued in and took the next $2000 payment as the AIP.
My question is do we have a resource to find out exactly how much grant money they have in their account? It all seems very tricky and is it possible to take too much in AIP or do they just start pulling growth and capital once the grant portion is gone.
This is the hardest part to me as early on I had the kids funds in one of those places that was almost like Investors groups but didn't provide good growth and hit me with heavy management yearly fees etc. I transferred it all out into a different fund a few years back and that was a nightmare as they pulled all the stunts like Investor Group with backend loaded fees etc.. I did get the money but not sure really how much I lost and how much grant money came across.

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Re: RESP Asset Allocation over time.
« Reply #40 on: February 17, 2018, 12:06:50 PM »
Great discussion to catch up on.
My biggest mistake off the get go was taking a capital payment rather than the AIP which draws down the grants instead. Initially I took the capital but clued in and took the next $2000 payment as the AIP.
My question is do we have a resource to find out exactly how much grant money they have in their account? It all seems very tricky and is it possible to take too much in AIP or do they just start pulling growth and capital once the grant portion is gone.
This is the hardest part to me as early on I had the kids funds in one of those places that was almost like Investors groups but didn't provide good growth and hit me with heavy management yearly fees etc. I transferred it all out into a different fund a few years back and that was a nightmare as they pulled all the stunts like Investor Group with backend loaded fees etc.. I did get the money but not sure really how much I lost and how much grant money came across.

I did the same thing a few years ago and just assumed that all the grant money was still there.  The fees would have come out of the principle I deposited.  I have no idea if this is correct or not, but I'm not too worried since I only had a couple years worth of contributions in there.

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Re: RESP Asset Allocation over time.
« Reply #41 on: February 17, 2018, 05:18:32 PM »
How withdrawals work.   I researched the heck out of this, but only learned the following when I actually made the withdrawals:...

What you already know
1)  Only $5000 of the EAP (Education Assistance payment = CESG + Accumulated Income Payment, AIP) can be withdrawn in the first term.  After successful completion of the first term, following terms have no cap.   

1b)  There is no cap to the withdrawal of original contributions, but there are penalties if you take it without the student being enrolled, with proof of enrollment provided.

2)  Can use the $'s for anything, only need proof of enrollment.

3)  CESG and and Accumulated income are only deposited to the beneficiary's account or as a cheque to the named beneficiary.   They are taxed on the EAP provided.  Only contributors can direct $'s to be removed, however.   

3b) The original contributions  (without interest income) are withdrawn tax free, and can be put into your (the contributor's) account.   The penalty of doing so without having your kid in school is a freeze on future CESG contributions for 2 years.  Also, if you pull all the funds out and close the account, the CESG money will need to be given back to the government, and if the student is now 21+, and the plan is 9+ years old, the unused AIP is available to roll into your RRSP , transfer to another resp, or pay taxes and a penalty and receive it as cash.   

4)  Maximum of $7200 lifetime per person in CESG monies allowed.   If you have less than $14,400 and two kids, the first kid can take more than half the CESG monies.   e.g., If you have $10k of CESG, the first kid can claim $7k of it, leaving only $3k for the second kid, if it is a family RESP account.   If it is not a family account, you can ask to transfer $'s to the second child (blood relations of siblings in the same family, etc).

What was news to me as I tried to withdraw:

A)  You can not ask for JUST CESG portion first (I tried to get $5k as CESG only) , then AIP, then the contributions.  i.e., I wanted to guarantee that we never gave back CESG money, so I wanted to use it, alone, first.   Any EAP withdrawal is a combination of CESG and AIP.

B)  Our first $5000 was all EAP... and it consisted of $2k of CESG and $3k of of AIP.  So, it comes out as 40% CESG and 60% AIP. Once the CESG limit is hit, then the rest is AIP.   I think the 40/60 is the set ratio by the government. (but I am unsure if it varies with the size of the AIP in the account, or is always set at 40%.  I assume it is always set at 40%)

C)  You need to show proof of 13 weeks (1 term) of school completion (a transcript) in order to receive any EAP pay outs greater than $5k at any time.   They don't seem to keep a record of a prior term's proof of registration on file.  This is a gov't requirement, according to my brokerage, not a bank requirement.

D)  The proof of enrollment was an automatic letter / file pulled onto my DD's registration log-in by the school, and easy to get without asking anyone other than DD to print it.  An unofficial transcript was accepted as proof of 13 weeks of completion.

E)  It took 3 business days to process the requests, each time, once all paperwork is in.   

F)  You have to sell your positions and have the $'s sitting as cash, and settled (2 business days after selling equity for it to settle) before they can process the withdrawal.

G)  We received a letter with the specific CESG / AIP / Contribution breakdown of the amounts withdrawn from our account in the mail about 8 days later.