Author Topic: Canadian Ex-Pat: Should I withdraw bad RESP elections and put in NYS 529?  (Read 1117 times)

NorthernBlitz

  • Bristles
  • ***
  • Posts: 342
Background: We moved to the US in 2013. While in Canada, we didn't know about low-cost index investing so we sunk almost all of our money into our mortgage.

One exception was our Retired Educations Savings Plan. For those that don't know, these are for college savings. You put in $2500 (after tax money) and the government contributes an additional $500. It grows tax deferred, but the income upon withdrawal is for the student.

Our "investments" are with RBC (a big Canadian bank). I won't get into the products we have, but they suck. When filling out my FBAR this year, I see that from Jan 2016 - Jan 2017 we made about 1%. As non-residents, we can't purchase different Mutual Funds or ETFs. There are some bond type investments we can get, but they will also likely underperform.

If we withdraw the money from the RESP accounts, my understanding is that we have to:
1) Return the original government contributions (~17% of the principle).
2) Pay income tax on the gains (our marginal rate + 20%). As non-residents, I think that this means we'd pay 25% + 20%.

In our case, our initial investment was
Our investment: $10,000
Government Contribution: $2000
Gains: $3,500

So, if we withdrew now our $15,500 would become $11,925 ($10k + 55% * $3,500).

We'd convert this to USD with a money changer like interchange and get close to the actual exchange rate. Let's assume my $11,925 CDN becomes $8,852.

My girls are now 7 and 5. If I put this in a Vanguard total market index in a NYS 529 plan, I'd get 6.25% back on my taxes next year ($550).

If that happens, then when my youngest is 18 the investment in the 529 would be about $21,300 (assuming 7%/year with dividends reinvested).

Here are the values of our RESP given potential rates of return (in USD converted at today's rate ~ $0.74 CDN / $1 USD)

Return---$0.74 C/US---$1 C/US
1%--------$13,054-----$17,640
2%--------$14,837-----$20,050
3%--------$16,844-----$22,762
4%--------$19,098-----$25,808
5%--------$21,628-----$29,227

If the exchange rate stays the same we need to return over 5% on the Canadian investments to win leaving money in Canada.
If we got to parity again, we'd need between 2-3% to win leaving money in Canada.

My guess is that we'll get returns between 2-3%.

The side benefit of moving the money would be that we wouldn't need to fill out an FBAR form every year, but that's about 10 minutes worth of effort.

If you were in my shoes, what would you do?

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1346
The more expats I read about, the more I want to stay at home.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6177
  • Location: BC
In my experience, you can decide rather suddenly to leave the US and move back home.  For us it was the stalled out PR processing that made us feel unwelcome.

I would just leave the money in there.  Although your girls have at least 10 year of growth before pulling it, at least that is not 25 years of non-growth..  at 7% per year less returns x 10 years it is still a 78% drop in cash, not quite half.  Note-  I am moving our 14 year old's RESP funds into fixed income now, so the money won't drop before he needs it, so you, too, may not be equity invested for the long term.

Instead, just start saving new money in the US to top up the needed funds.  Look, after 4 years of contributions,it is only $15k locked up in 1% return funds in Canada, and you can easily beat that by saving new money in the USA for the next 10 years.

Hmm... IDK - as an expat, can a relative contribute to a new RESP they set up for each of the girls?  I think the locking clause is more to do to the fact that the contributor (that owns the funds) is no longer resident.  That would be awesome, because you could still get the full RESP government funds even out of the country and the relative could direct the investments as they choose.

Also look to see if you can transfer the account to a Bank Branch RESP / GIC only account with higher rates -- sometimes the bank fixed income type accounts (and savings accounts) are not locked for Expats.   At least you can move the money around to new fixed income investments every few years, and if interest rates rise, that is good.

Also look for an account that you can access as an expat and transfer it there.   I had the reverse problem with my IRA when we moved back to Canada, and found two US licensed investment banks that would not lock me out.   Start with TD Canada Trust, as TD Ameritrade was one of the two (on the US side) that would dual report for both countries.

One more idea -- and this one is likely the WORST option -- look into insurance companies.  perhaps you can transfer the RESP to an insurance education / scholarship product.  These usually have horrendous fees, but you may earn net more than 1% in the end.   Heritage scholarship group RESP, etc.   Insurance companies have weird products for niche situations, to talk to someone to see if they have something that works for you (yet would be a horrible idea for anyone else).
« Last Edit: March 11, 2017, 08:23:31 PM by Goldielocks »

NorthernBlitz

  • Bristles
  • ***
  • Posts: 342
In my experience, you can decide rather suddenly to leave the US and move back home.  For us it was the stalled out PR processing that made us feel unwelcome.

I would just leave the money in there.  Although your girls have at least 10 year of growth before pulling it, at least that is not 25 years of non-growth..  at 7% per year less returns x 10 years it is still a 78% drop in cash, not quite half.  Note-  I am moving our 14 year old's RESP funds into fixed income now, so the money won't drop before he needs it, so you, too, may not be equity invested for the long term.

Instead, just start saving new money in the US to top up the needed funds.  Look, after 4 years of contributions,it is only $15k locked up in 1% return funds in Canada, and you can easily beat that by saving new money in the USA for the next 10 years.

Hmm... IDK - as an expat, can a relative contribute to a new RESP they set up for each of the girls?  I think the locking clause is more to do to the fact that the contributor (that owns the funds) is no longer resident.  That would be awesome, because you could still get the full RESP government funds even out of the country and the relative could direct the investments as they choose.

Also look to see if you can transfer the account to a Bank Branch RESP / GIC only account with higher rates -- sometimes the bank fixed income type accounts (and savings accounts) are not locked for Expats.   At least you can move the money around to new fixed income investments every few years, and if interest rates rise, that is good.

Also look for an account that you can access as an expat and transfer it there.   I had the reverse problem with my IRA when we moved back to Canada, and found two US licensed investment banks that would not lock me out.   Start with TD Canada Trust, as TD Ameritrade was one of the two (on the US side) that would dual report for both countries.

One more idea -- and this one is likely the WORST option -- look into insurance companies.  perhaps you can transfer the RESP to an insurance education / scholarship product.  These usually have horrendous fees, but you may earn net more than 1% in the end.   Heritage scholarship group RESP, etc.   Insurance companies have weird products for niche situations, to talk to someone to see if they have something that works for you (yet would be a horrible idea for anyone else).

Thanks, I appreciate the advice.

I like the idea of focusing more on our "new" investments in the US. I'll try to think of the RESP money as extra / bonus cash. Plus, you never know if we'll end up moving back.

We'll look into the products you've suggested. If I remember correctly, there may have been some kind of GIC that was tied to market returns (maybe in the banking sector?)...we'll check out our options next time we're up in Canada.