Author Topic: Treating an RESP as an interest free loan to your kids  (Read 3547 times)

Reggie

  • Stubble
  • **
  • Posts: 138
  • Age: 33
  • Location: Ottawa, ON
Treating an RESP as an interest free loan to your kids
« on: October 05, 2020, 08:12:59 AM »
Iím working on a blog post about my RESP strategy (a different way to look at it)and looking for some feedback on my idea.

Iím not going to post it here because I donít want this topic to be spammy (Iíll share it later if anyone is interested).

In summary I am using my RESP to offer an 18-22 year interest free loan to my kids.  My goal is to contribute $36,000 to an RESP for each of my children (over 15 years) and maximizing the government grant portions and take my principal back in the future before closing the account. This can be done with no penalties or taxes as itís already ďafter-taxĒ dollars.

When invested pretty conservatively (by my standards), just the grants and investment income could grow to generate about $30,000 (adjusted for inflation). This would be enough to pay for an average 4-year university degree program in Canada.

Obviously we have to take into account the opportunity cost of the interest free loan. But when considering a lot of average Canadians are using pathetically low high interest savings accounts (at their big banks), you donít lose much compared to putting it there.

Iíve even ran some numbers under another scenerio where you actually take back all your principal as well as the growth on the principal down the road and put it in your own RRSP.  This is all allowed under the rules (as long as you make sure you have RRSP room for the investment income portion before closing the RESP). Under this scenario, the remaining accumulated grants and growth on those grants would come up to about $12,000 which is still a pretty good amount to give the kids a head start.  Almost enough to pay for half of a 4-year degree and or an entire 3-year college program.

I know some people may have issues with these strategies as they may think they are ďtaking their kids moneyĒ but it beats not starting an RESP all together (which I think represents a large portion of Canadians).  Under these strategies, you always have the chance to change your mind if you are doing very well financially and think there is value in helping the kids further. Some people debate if they should contribute to RESPs if they are not maxed out on their RRSPs well under this scenario you can invest in your retirement and the kids education at the same time.

On another education related topic. I also did some mock calculations on the government grants websites (in Ontario itís OSAP) to see how much my kids would be eligible if they started a university program today.  Under our current (pretty low) FIRE family income, each of our kids would be eligible in over $7,000 in grants each year.  So assuming we donít take a huge step backwards on funding post-secondary education, I canít imagine a scenario where my kids would even need the RESP principal.











Mighty Eyebrows

  • Stubble
  • **
  • Posts: 203
  • Location: Vancouver Island, Canada
Re: Treating an RESP as an interest free loan to your kids
« Reply #1 on: October 05, 2020, 10:19:22 PM »
My goal is to contribute $36,000 to an RESP for each of my children (over 15 years) and maximizing the government grant portions and take my principal back in the future before closing the account. This can be done with no penalties or taxes as itís already ďafter-taxĒ dollars.

Yes, this works fine.

As long as you have planned it ahead, I don't see a problem with using it this way. The principal contributions do remain the property of the contributor until the end. I would have more of a problem planning to take interest money out instead of letting the child use it for education.


Lews Therin

  • Magnum Stache
  • ******
  • Posts: 3494
  • Age: 32
  • Location: Gatineau
  • Used to be Canadian Ben
Re: Treating an RESP as an interest free loan to your kids
« Reply #2 on: October 06, 2020, 08:39:07 AM »
Iím working on a blog post about my RESP strategy (a different way to look at it)and looking for some feedback on my idea.

Iím not going to post it here because I donít want this topic to be spammy (Iíll share it later if anyone is interested).

In summary I am using my RESP to offer an 18-22 year interest free loan to my kids.  My goal is to contribute $36,000 to an RESP for each of my children (over 15 years) and maximizing the government grant portions and take my principal back in the future before closing the account. This can be done with no penalties or taxes as itís already ďafter-taxĒ dollars.

When invested pretty conservatively (by my standards), just the grants and investment income could grow to generate about $30,000 (adjusted for inflation). This would be enough to pay for an average 4-year university degree program in Canada.

Obviously we have to take into account the opportunity cost of the interest free loan. But when considering a lot of average Canadians are using pathetically low high interest savings accounts (at their big banks), you donít lose much compared to putting it there.

Iíve even ran some numbers under another scenerio where you actually take back all your principal as well as the growth on the principal down the road and put it in your own RRSP.  This is all allowed under the rules (as long as you make sure you have RRSP room for the investment income portion before closing the RESP). Under this scenario, the remaining accumulated grants and growth on those grants would come up to about $12,000 which is still a pretty good amount to give the kids a head start.  Almost enough to pay for half of a 4-year degree and or an entire 3-year college program.

I know some people may have issues with these strategies as they may think they are ďtaking their kids moneyĒ but it beats not starting an RESP all together (which I think represents a large portion of Canadians).  Under these strategies, you always have the chance to change your mind if you are doing very well financially and think there is value in helping the kids further. Some people debate if they should contribute to RESPs if they are not maxed out on their RRSPs well under this scenario you can invest in your retirement and the kids education at the same time.

On another education related topic. I also did some mock calculations on the government grants websites (in Ontario itís OSAP) to see how much my kids would be eligible if they started a university program today.  Under our current (pretty low) FIRE family income, each of our kids would be eligible in over $7,000 in grants each year.  So assuming we donít take a huge step backwards on funding post-secondary education, I canít imagine a scenario where my kids would even need the RESP principal.

HE'S ALIVE!

There are other ways to use the RESP income including for general life expenses during school isn't it? (So they could be taking out more than they need, and simply transferring to their TFSAs?

Reggie

  • Stubble
  • **
  • Posts: 138
  • Age: 33
  • Location: Ottawa, ON
Re: Treating an RESP as an interest free loan to your kids
« Reply #3 on: October 07, 2020, 07:52:52 AM »
Lol. Yes Iím alive. After a nearly 2 year hiatus Iím trying to write again. Now that 2/3 of my kids are in school full time, I have a little more free time.

Youíre right that there are so many ways to use the RRSPs so getting it out wonít really be much of a problem. But I likely wonít make it easy for the kids to take out money and just fund their TFSA.  I might help them put a down payment on a rental property that they can live in and manage while in school if I think its a good way to get them ahead.  My most important point being that I donít want to just give my kids money because I think there is some sort of parental obligation to do so once they start their adult life. But I will definitely take advantage of the free government money on their behalf and they will get it for sure. Iíve always been pro-free-money.

I got through university on my own financially and even accumulated some debt. I believe my being financially responsible for my education gave me a huge advantage in life.






elaine amj

  • Magnum Stache
  • ******
  • Posts: 4700
  • Location: Ontario
Re: Treating an RESP as an interest free loan to your kids
« Reply #4 on: October 07, 2020, 10:32:38 AM »
Getting RESP money out hasn't been a huge problem.  The withdrawals all go to your bank account (kids get taxed on the EAP or grant + interest portion of your withdrawals) and then you can decide how much to give to your kids. I hedge against the possibility of their not staying in school and withdraw far more than they need. For now, I just pay their tuition and keep the rest.

In DD's first year I took out $10k and then a second $16k in her second year, all in EAPs so haven't touched principal. Next withdrawal might be a problem though. I have their funds split in two different institutions.

I have now withdrawn her entire CESG grant portion in the one institution.  I was advised not to withdraw any more EAPs for her, just principal. Not sure how the bank expects me to be able to withdraw the rest of the earned interest? The rep I talked to said it would be easier to leave it for my son.

I think the whole withdrawal setup is a little ridiculous.  But I imagine the rep just didn't know much and the back office should be able to manipulate the withdrawal so my request for EAPs next year can be just for earned interest (so I don't accidentally withdraw more CESG grant that she is entitled to).


Sent from my VCE-AL00 using Tapatalk


Reggie

  • Stubble
  • **
  • Posts: 138
  • Age: 33
  • Location: Ottawa, ON
Re: Treating an RESP as an interest free loan to your kids
« Reply #5 on: October 15, 2020, 07:33:57 AM »
Getting RESP money out hasn't been a huge problem.  The withdrawals all go to your bank account (kids get taxed on the EAP or grant + interest portion of your withdrawals) and then you can decide how much to give to your kids. I hedge against the possibility of their not staying in school and withdraw far more than they need. For now, I just pay their tuition and keep the rest.

In DD's first year I took out $10k and then a second $16k in her second year, all in EAPs so haven't touched principal. Next withdrawal might be a problem though. I have their funds split in two different institutions.

I have now withdrawn her entire CESG grant portion in the one institution.  I was advised not to withdraw any more EAPs for her, just principal. Not sure how the bank expects me to be able to withdraw the rest of the earned interest? The rep I talked to said it would be easier to leave it for my son.

I think the whole withdrawal setup is a little ridiculous.  But I imagine the rep just didn't know much and the back office should be able to manipulate the withdrawal so my request for EAPs next year can be just for earned interest (so I don't accidentally withdraw more CESG grant that she is entitled to).


Sent from my VCE-AL00 using Tapatalk


Thanks for the insight from someone who has actually started using RESPs!

Iím encouraged to hear that it was pretty simple to take out the money the first few years. It appears that the process of splitting the 3 amounts (CEGS, interest and principals) must be confusing. That is one thing I canít seem to figure out. It seems easy to determine the difference between the principal vs. the grants/interest. But I wonder if there is a way to differentiate the grants vs. the interest.

For example in the event that the child never uses any of the RESP.  Then you must pay back the grants but you could keep the interest by transferring it to an RRSP. But what about the interest on the grant portion?




oneyearfromnow

  • Bristles
  • ***
  • Posts: 498
  • Age: 55
  • Location: Canada's Capital
  • a life-long frugalitarian
Re: Treating an RESP as an interest free loan to your kids
« Reply #6 on: October 15, 2020, 04:59:49 PM »
Lol. Yes Iím alive. After a nearly 2 year hiatus Iím trying to write again. Now that 2/3 of my kids are in school full time, I have a little more free time.

Youíre right that there are so many ways to use the RRSPs so getting it out wonít really be much of a problem. But I likely wonít make it easy for the kids to take out money and just fund their TFSA.  I might help them put a down payment on a rental property that they can live in and manage while in school if I think its a good way to get them ahead.  My most important point being that I donít want to just give my kids money because I think there is some sort of parental obligation to do so once they start their adult life. But I will definitely take advantage of the free government money on their behalf and they will get it for sure. Iíve always been pro-free-money.

I got through university on my own financially and even accumulated some debt. I believe my being financially responsible for my education gave me a huge advantage in life.

My husbandís niece is attending university at a HCOL city.  She missed out on Residence.   Brother in Law bought an investment property there, to which some of the RESP pays rent.  So, his money contributed years before, is being returned back to him.  Tidy.

elaine amj

  • Magnum Stache
  • ******
  • Posts: 4700
  • Location: Ontario
Re: Treating an RESP as an interest free loan to your kids
« Reply #7 on: October 20, 2020, 10:33:02 AM »
From my understanding (not a massive amount of info on withdrawals out there), you keep the interest earned by the grants. Basically, all the money in the RESP is split into three portions:
- principal
- grants (we got the max $7200 for each child - had to do a lot of math in the last few years)
- interest earned (on principal + grants)

The last two are withdrawn as EAPs and taxable in the hands of the child.

It is all rather unnecessarily complicated IMO. Neither of my institutions allow us to withdraw online. One still needs an old-fashioned fax and the other I can email back a signed PDF. In one institution, it takes a couple of days after I call to request the back office do math to confirm current amount of interest earned, etc. Then I have to call back and the rep can check it in my notes. Of course, by the time I withdraw, that number has changed lol.

I am still wondering just how I can withdraw all the interest earned but I decided that is next year's problem.

I had about $120k saved up in a RESP for both kids in two institutions. $72k in principal, $34k in interest and growth, and $14,400 in grants.  So far for DD, I have withdrawn a little over $16k in Year 1 and about the same in Year 2 so about $33k total. I withdrew $5k for DS so far in Year 1. I was told that as long as it was not outrageous, no questions get asked on how the money is spent and it all goes to my bank account. 

I used the money to pay her tuition and kept the rest for now. The plan was always for me to keep the excess. So far, it looks like between them, it might only cost $30-50k as they do get OSAP grants and my DS goes to a college so its cheaper.

Based on our current reality, I'll likely end up doing what you are proposing and keeping all the principal. I've already been toying with the idea of giving them some of the excess and next year plan to give them a boost by maxings out their TFSAs (or their RRSPs - I haven't decided). So a $6k gift each.

That said, we are FIREd now and should have enough to sustain us although I don't have a huge margin of safety. So now your idea is extra intriguing. I might take the extra RESPs, split it between the two, and loan it to them for their RRSPs. If I end up broke and needing the money, I might call back the loan letting them keep the interest, but if I don't,  it should give them a nice boost for retirement. That way I hedge for my future in case I need the money but I give them a helping hand when they are young.

Sent from my VCE-AL00 using Tapatalk


Mighty Eyebrows

  • Stubble
  • **
  • Posts: 203
  • Location: Vancouver Island, Canada
Re: Treating an RESP as an interest free loan to your kids
« Reply #8 on: October 20, 2020, 11:05:47 AM »
I am not a lawyer, but something to keep in mind:

As the contributor, before the child goes to university, you can take all the funds out of the RESP and have the interest taxed (punitively) in your own hands, or put it into your RRSP.

However, once any EAP has been paid out and taxed in your child's hands, it really is their legal property. You may have a great relationship with your offspring, but be aware that an estranged child could have legal grounds to challenge you if the EAP was taxed in their hands, but you kept some of it without a clear agreement from them.

Most parents are covering so many school expenses that this shouldn't be a real issue, but for a RESP with a large interest component, think carefully about who it belongs to at which stage.

elaine amj

  • Magnum Stache
  • ******
  • Posts: 4700
  • Location: Ontario
Re: Treating an RESP as an interest free loan to your kids
« Reply #9 on: October 20, 2020, 11:23:50 AM »
A good warning. And a good risk to consider.

Sent from my VCE-AL00 using Tapatalk


UpNAtom

  • 5 O'Clock Shadow
  • *
  • Posts: 42
Re: Treating an RESP as an interest free loan to your kids
« Reply #10 on: October 22, 2020, 09:13:42 AM »
That goal for the contributions are definitely: take it back once school is paid for or let it pay for school (whichever comes first)

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6992
  • Location: BC
Re: Treating an RESP as an interest free loan to your kids
« Reply #11 on: October 26, 2020, 11:34:23 PM »
A few notes..  CESG is only paid out to the student - their account or a cheque in their name.  Contributions can be given to the account holder or the student.  Interest likewise.

I do find a tricky bit -- the interest can only be withdrawn by the student.   If you don't withdraw everything while they are in school, or they don't go to school, you need to wait until the youngest person /beneficiary is 21 and not attending school to withdraw the final interest to roll into your RRSP, or take it as cash with the extra tax on it.

If you withdraw your original contributions without a student attending a qualified school, any linked CESG is given back to the gov't on that amount, and you get a 2 year penalty in that no new CESG is matched on the account for the next 2 years.  so you can't withdraw when they are 14 and then put money back in for a second match the next year. (on the same funds).

The RESP minus the CESG is considered to belong to the contributors, not the student.

My bank now requires me (again) to go in person to get the signature on the fax form.  Which is crazy during Covid, as they often don't know anything about the form at the branch.  AND only the back office can give the three numbers - EAP, CESG, Contributions and it takes the back office up to a week to calculate this, it is very confusing.

vector

  • Stubble
  • **
  • Posts: 111
Re: Treating an RESP as an interest free loan to your kids
« Reply #12 on: November 14, 2020, 07:51:45 PM »
In summary I am using my RESP to offer an 18-22 year interest free loan to my kids.  My goal is to contribute $36,000 to an RESP for each of my children (over 15 years) and maximizing the government grant portions and take my principal back in the future before closing the account. This can be done with no penalties or taxes as itís already ďafter-taxĒ dollars.

When invested pretty conservatively (by my standards), just the grants and investment income could grow to generate about $30,000 (adjusted for inflation). This would be enough to pay for an average 4-year university degree program in Canada.

Obviously we have to take into account the opportunity cost of the interest free loan. But when considering a lot of average Canadians are using pathetically low high interest savings accounts (at their big banks), you donít lose much compared to putting it there.

I can confirm that this works, we did exactly that and closed everything a year or two ago. As somebody noted, it's a pain to get the EAP/CESG/contribution amounts from TD - no idea why their system doesn't show them and the advisor has to request them from the backoffice. So better keep your own records, at least for the contributions. We didn't care much about knowing the CESG amount, I think it is part of EAP once you start withdrawing. At least I don't remember specifically withdrawing CESG, we withdrew the EAP in child's bank account and then all the contributions in my account on the day we collapsed the RESP.

You probably know that there's an annual limit for the CESG your child can receive, so at least some of the payments have to be spread over as long as 18 years. If the child is under 1 year old now, you can start contributing now to get the CESG "matching". If he/she is older you can get up to 2 years of CESG matching (1 for the current year and one for a past year) in each calendar year. So if your child is now over 9 you will not be able to get all the available CESG. Don't ask me how I know :-(

Re opportunity cost: I don't see it that way. Your money can be invested identically, it will just work for your child instead of working for you. If you're willing to "gift" them the gains on the 36k anyway, it makes more sense to have the gains taxed in their hands (probably with $0 tax) instead of having it invested in your name in a RRSP or a taxable account then withdraw it and pass it as cash. Even if the child doesn't continue their studies you still end up a bit better than investing in a taxable account because the CESG money worked for you all this time. Even in this scenario the child may consider enrolling to a college just to get the "free" CESG instead of sending it back - the full CESG is a lot more more that the tuition for 1 semester.

V




vector

  • Stubble
  • **
  • Posts: 111
Re: Treating an RESP as an interest free loan to your kids
« Reply #13 on: November 14, 2020, 08:04:08 PM »
One more thing... If you are FIRE and have a relatively low income your children may qualify for other provincial grants. Be aware that your RESP account institution may *not* apply for those on your behalf as they automatically do for CESG. At least TD didn't do it and when we got wiser and asked about it, it was too late to fix anything.

V

Reggie

  • Stubble
  • **
  • Posts: 138
  • Age: 33
  • Location: Ottawa, ON
Re: Treating an RESP as an interest free loan to your kids
« Reply #14 on: November 19, 2020, 10:22:40 AM »
One more thing... If you are FIRE and have a relatively low income your children may qualify for other provincial grants. Be aware that your RESP account institution may *not* apply for those on your behalf as they automatically do for CESG. At least TD didn't do it and when we got wiser and asked about it, it was too late to fix anything.

V

Thanks for the insight and giving me more confidence in my plan. I did look into the additional CESG benefits available for low income families.  It looks like we may be eligible for an additional $100 per child in the coming years if we can keep our family income under $32,000.

Regarding the opportunity costs, you are right that itís probably much better in the kidís hands. I did some calculations based on what the average family is probably getting if they stash away their extra savings in a big bank high-interest accounts, instead of an RESP and the lost savings is hilariously low. RBC currently advertises their ďhigh-interest bank accountĒ at 0.05%!!

CANStache

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Treating an RESP as an interest free loan to your kids
« Reply #15 on: January 18, 2021, 01:30:30 PM »
Getting RESP money out hasn't been a huge problem.  The withdrawals all go to your bank account (kids get taxed on the EAP or grant + interest portion of your withdrawals) and then you can decide how much to give to your kids. I hedge against the possibility of their not staying in school and withdraw far more than they need. For now, I just pay their tuition and keep the rest.

In DD's first year I took out $10k and then a second $16k in her second year, all in EAPs so haven't touched principal. Next withdrawal might be a problem though. I have their funds split in two different institutions.

I have now withdrawn her entire CESG grant portion in the one institution.  I was advised not to withdraw any more EAPs for her, just principal. Not sure how the bank expects me to be able to withdraw the rest of the earned interest? The rep I talked to said it would be easier to leave it for my son.

I think the whole withdrawal setup is a little ridiculous.  But I imagine the rep just didn't know much and the back office should be able to manipulate the withdrawal so my request for EAPs next year can be just for earned interest (so I don't accidentally withdraw more CESG grant that she is entitled to).

Hi Elaine, so glad to read your post, as I haven't found any useful articles on the topic of multiple family RESPs, but I'm in the exact same situation as you.  3 kids, two large plans (Scotia and TDDI) and I'm currently withdrawing for my oldest.  I've almost withdrawn all the EAP/CESG he's eligible for, and I've taken it all from the Scotia plan.  I haven't touched any contribution $ yet.

The Scotia advisor said it shouldn't matter where the CESG comes from, so long as it's $7200 or less in total.  But I wonder if the same is true for contribution $, which are earmarked per child.  I'll be wanting to move the $36K from #1Son out before he's done uni, but in the meantime additional growth will come from it - I'm hoping that will just get baked into the other 2 kids' growth, but with terrible reporting and management from both banks, it feels like a bit of a guess at times.

My goal is to draw down the Scotia account first in any case, as I do more of my investing at TDDI now, I just have to hope I'm doing it the right way, I guess.

elaine amj

  • Magnum Stache
  • ******
  • Posts: 4700
  • Location: Ontario
Re: Treating an RESP as an interest free loan to your kids
« Reply #16 on: January 21, 2021, 12:52:19 PM »
Withdrawals definitely feels like a huge guessing game.

I started withdrawals for Child #2 this past September and have gotten way less CESG for him than I did for Child#1 in almost exactly the same withdrawal timeline (and amounts) the year before!

Perhaps we need to start our own RESP withdrawal thread to discuss crazy banks lol.

Sent from my VCE-AL00 using Tapatalk


Stasher

  • Handlebar Stache
  • *****
  • Posts: 1788
  • Age: 48
  • Location: Vancouver Island
  • Power through Positivity
    • Mindful Explorer
Re: Treating an RESP as an interest free loan to your kids
« Reply #17 on: January 23, 2021, 11:06:06 AM »
My son writes his final red seal exam this week and I will take a bit out for him and then I need to figure out how to pull the rest out. He is done school completely now. My daughter is 19 and has no plans to go to post secondary school now, she graduated back in 2019. So I have this big pot of investments sitting with no idea where or how to really pull it out now.

c-kat

  • Stubble
  • **
  • Posts: 106
Re: Treating an RESP as an interest free loan to your kids
« Reply #18 on: January 23, 2021, 12:41:09 PM »
Iím working on a blog post about my RESP strategy (a different way to look at it)and looking for some feedback on my idea.

Iím not going to post it here because I donít want this topic to be spammy (Iíll share it later if anyone is interested).

In summary I am using my RESP to offer an 18-22 year interest free loan to my kids.  My goal is to contribute $36,000 to an RESP for each of my children (over 15 years) and maximizing the government grant portions and take my principal back in the future before closing the account. This can be done with no penalties or taxes as itís already ďafter-taxĒ dollars.

When invested pretty conservatively (by my standards), just the grants and investment income could grow to generate about $30,000 (adjusted for inflation). This would be enough to pay for an average 4-year university degree program in Canada.

Obviously we have to take into account the opportunity cost of the interest free loan. But when considering a lot of average Canadians are using pathetically low high interest savings accounts (at their big banks), you donít lose much compared to putting it there.

Iíve even ran some numbers under another scenerio where you actually take back all your principal as well as the growth on the principal down the road and put it in your own RRSP.  This is all allowed under the rules (as long as you make sure you have RRSP room for the investment income portion before closing the RESP). Under this scenario, the remaining accumulated grants and growth on those grants would come up to about $12,000 which is still a pretty good amount to give the kids a head start.  Almost enough to pay for half of a 4-year degree and or an entire 3-year college program.

I know some people may have issues with these strategies as they may think they are ďtaking their kids moneyĒ but it beats not starting an RESP all together (which I think represents a large portion of Canadians).  Under these strategies, you always have the chance to change your mind if you are doing very well financially and think there is value in helping the kids further. Some people debate if they should contribute to RESPs if they are not maxed out on their RRSPs well under this scenario you can invest in your retirement and the kids education at the same time.

On another education related topic. I also did some mock calculations on the government grants websites (in Ontario itís OSAP) to see how much my kids would be eligible if they started a university program today.  Under our current (pretty low) FIRE family income, each of our kids would be eligible in over $7,000 in grants each year.  So assuming we donít take a huge step backwards on funding post-secondary education, I canít imagine a scenario where my kids would even need the RESP principal.

This is a very interesting idea. Thanks for posting. I also didn't realize that those grants were available.  We will be FI by the time our kids go to school, so using the calculator, it looks like they would qualify for the grants too.  One question I have is do kids still qualify for the grants if they have an RESP?

Reggie

  • Stubble
  • **
  • Posts: 138
  • Age: 33
  • Location: Ottawa, ON
Re: Treating an RESP as an interest free loan to your kids
« Reply #19 on: January 24, 2021, 06:16:38 AM »
Iím working on a blog post about my RESP strategy (a different way to look at it)and looking for some feedback on my idea.

Iím not going to post it here because I donít want this topic to be spammy (Iíll share it later if anyone is interested).

In summary I am using my RESP to offer an 18-22 year interest free loan to my kids.  My goal is to contribute $36,000 to an RESP for each of my children (over 15 years) and maximizing the government grant portions and take my principal back in the future before closing the account. This can be done with no penalties or taxes as itís already ďafter-taxĒ dollars.

When invested pretty conservatively (by my standards), just the grants and investment income could grow to generate about $30,000 (adjusted for inflation). This would be enough to pay for an average 4-year university degree program in Canada.

Obviously we have to take into account the opportunity cost of the interest free loan. But when considering a lot of average Canadians are using pathetically low high interest savings accounts (at their big banks), you donít lose much compared to putting it there.

Iíve even ran some numbers under another scenerio where you actually take back all your principal as well as the growth on the principal down the road and put it in your own RRSP.  This is all allowed under the rules (as long as you make sure you have RRSP room for the investment income portion before closing the RESP). Under this scenario, the remaining accumulated grants and growth on those grants would come up to about $12,000 which is still a pretty good amount to give the kids a head start.  Almost enough to pay for half of a 4-year degree and or an entire 3-year college program.

I know some people may have issues with these strategies as they may think they are ďtaking their kids moneyĒ but it beats not starting an RESP all together (which I think represents a large portion of Canadians).  Under these strategies, you always have the chance to change your mind if you are doing very well financially and think there is value in helping the kids further. Some people debate if they should contribute to RESPs if they are not maxed out on their RRSPs well under this scenario you can invest in your retirement and the kids education at the same time.

On another education related topic. I also did some mock calculations on the government grants websites (in Ontario itís OSAP) to see how much my kids would be eligible if they started a university program today.  Under our current (pretty low) FIRE family income, each of our kids would be eligible in over $7,000 in grants each year.  So assuming we donít take a huge step backwards on funding post-secondary education, I canít imagine a scenario where my kids would even need the RESP principal.

This is a very interesting idea. Thanks for posting. I also didn't realize that those grants were available.  We will be FI by the time our kids go to school, so using the calculator, it looks like they would qualify for the grants too.  One question I have is do kids still qualify for the grants if they have an RESP?

My understanding in Ontario is that yes kids can still qualify for grants regardless of having an RESP or how big it is. However when you take out grant portions (EAP) in the childís name, it will count as taxable income which may affect the total amount they are eligible for.

I donít think it would have a huge impact though as OSAP is largely based on the parents income. But you can strategize your withdrawals around this.



elaine amj

  • Magnum Stache
  • ******
  • Posts: 4700
  • Location: Ontario
Re: Treating an RESP as an interest free loan to your kids
« Reply #20 on: January 24, 2021, 11:04:19 AM »

This is a very interesting idea. Thanks for posting. I also didn't realize that those grants were available.  We will be FI by the time our kids go to school, so using the calculator, it looks like they would qualify for the grants too.  One question I have is do kids still qualify for the grants if they have an RESP?

Yes. My two kids still get a very decent amount of grants as it is primarily based on parental income. They also get more grants if they don't live at home. I have been withdrawing about $10k/yr each to try to get as much out as early as possible. Just in case.


Sent from my VCE-AL00 using Tapatalk

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6992
  • Location: BC
Re: Treating an RESP as an interest free loan to your kids
« Reply #21 on: February 02, 2021, 02:48:38 PM »
Iím working on a blog post about my RESP strategy (a different way to look at it)and looking for some feedback on my idea.

Iím not going to post it here because I donít want this topic to be spammy (Iíll share it later if anyone is interested).

In summary I am using my RESP to offer an 18-22 year interest free loan to my kids.  My goal is to contribute $36,000 to an RESP for each of my children (over 15 years) and maximizing the government grant portions and take my principal back in the future before closing the account. This can be done with no penalties or taxes as itís already ďafter-taxĒ dollars.

When invested pretty conservatively (by my standards), just the grants and investment income could grow to generate about $30,000 (adjusted for inflation). This would be enough to pay for an average 4-year university degree program in Canada.

Obviously we have to take into account the opportunity cost of the interest free loan. But when considering a lot of average Canadians are using pathetically low high interest savings accounts (at their big banks), you donít lose much compared to putting it there.

Iíve even ran some numbers under another scenerio where you actually take back all your principal as well as the growth on the principal down the road and put it in your own RRSP.  This is all allowed under the rules (as long as you make sure you have RRSP room for the investment income portion before closing the RESP). Under this scenario, the remaining accumulated grants and growth on those grants would come up to about $12,000 which is still a pretty good amount to give the kids a head start.  Almost enough to pay for half of a 4-year degree and or an entire 3-year college program.

I know some people may have issues with these strategies as they may think they are ďtaking their kids moneyĒ but it beats not starting an RESP all together (which I think represents a large portion of Canadians).  Under these strategies, you always have the chance to change your mind if you are doing very well financially and think there is value in helping the kids further. Some people debate if they should contribute to RESPs if they are not maxed out on their RRSPs well under this scenario you can invest in your retirement and the kids education at the same time.

On another education related topic. I also did some mock calculations on the government grants websites (in Ontario itís OSAP) to see how much my kids would be eligible if they started a university program today.  Under our current (pretty low) FIRE family income, each of our kids would be eligible in over $7,000 in grants each year.  So assuming we donít take a huge step backwards on funding post-secondary education, I canít imagine a scenario where my kids would even need the RESP principal.

This is a very interesting idea. Thanks for posting. I also didn't realize that those grants were available.  We will be FI by the time our kids go to school, so using the calculator, it looks like they would qualify for the grants too.  One question I have is do kids still qualify for the grants if they have an RESP?

My understanding in Ontario is that yes kids can still qualify for grants regardless of having an RESP or how big it is. However when you take out grant portions (EAP) in the childís name, it will count as taxable income which may affect the total amount they are eligible for.

I donít think it would have a huge impact though as OSAP is largely based on the parents income. But you can strategize your withdrawals around this.

Just a bit of a twist / clarification on this, the student loan application asks how much RESP money the student will receive, and this is put into the "available resources" side of the loan equation.   Just state the CESG + Income amount of the RESP that will be taken out for the student's use... or leave it blank if you are unsure if you will draw down any.   Always assume that the original contributions go back to you, the original contributor, so it has no impact on the student loan application.

If you leave this line blank on the student loan application, then the formula will calculate  either the same or more generously in your student's favour (depending on your situation). 

If you later do withdraw CESG / income from the RESP that term, then, you might get a "repay" notice for a small portion of the grant money, with fairly generous repayment terms (can delay it until graduation), or more commonly, the NEXT student loan application by that student will subtract the prior loan "overage", after the next term's "assessed need" is calculated.   

So, there really is no penalty if you state "zero RESP" on the student loan application, just a 1:1 repayment  of the overage if done on time.

UpNAtom

  • 5 O'Clock Shadow
  • *
  • Posts: 42
Re: Treating an RESP as an interest free loan to your kids
« Reply #22 on: February 12, 2021, 10:29:12 AM »
Low-income question(/confirmation) that had not come to mind until I updated the FIRE calc:  If the child has already received the 7,200$ max - would they still get the low-income grant if the family income is under the 98k?  My reading would indicate that yes.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6992
  • Location: BC
Re: Treating an RESP as an interest free loan to your kids
« Reply #23 on: April 16, 2021, 05:36:10 PM »
Some of the grants have different names.

The CESG grant of 20%, 30%, 40% is all the same grant, subject to $7200
The low income grant is separate (different name / rules) and not subject to the $7200 cap.