Saving for Our Kid’s Education with the RESP

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Because it’s us, the first thing I did after Little Matchstick was born was apply for his passport. The second thing I did was apply for his Social Insurance Number so I could start opening new trading accounts. They say that the joy of parenthood is its own reward, but you know what’s even better? The joy of parenthood PLUS sweet-ass tax breaks!

Saving for your kids’ future education costs is like any other investment goal. The sooner you get started, the better, because then you’ll have time on your side to give your investments that sweet compounding effect that we all love. And it goes without saying that we should do it in as tax-efficient manner as possible, because anything the government takes along the way will interfere with said compounding. And if you can get some help from the government as well, even better!

So let’s take a look at the education savings plans that both Canada and the USA offers and see how they work, shall we?

Registered Education Savings Plan (RESP)

I’m going to start with Canada because for once, we have a leg up on the Americans. Most of the time, the US system tax system is more confusing, but once you figure out how it works, the Americans system is more generous than the Canadian one. But for education savings plans, for once, ours is simpler AND more useful.

The RESP is a tax-advantaged plan, meaning you can’t deduct contributions from your income, but whatever you put in compounds tax-free. When withdrawn for educational purposes, it’s taxed in the hands of the child, and since most 17-year-olds don’t have any income, it’s essentially tax-free if the income is applied against their personal exemption.

If our child chooses not to go to post-secondary school, then we’ll get hit with a 20% penalty when we try to withdraw from the account, but let’s get realistic here. Little Matchstick is Chinese, his parents are Chinese, and all his grandparents are Chinese. This kid’s going to university or he’ll be drowned by his ancestors’ tears of shame.

ANYWAY, all that is similar to the American system. Here’s where ours gets interesting: The CESG.

The CESG stands for the Canadian Education Savings Grant, and it’s basically a government-matched subsidy that helps you pay for your kid’s education. The government matches 20% of whatever you contribute, up to $500 per year. There’s also a $7200 lifetime limit.

There are also additional grants available for low-income families, but for now we’re going to focus on the “Basic” CESG amount since everyone is eligible for this. Please click here to read up on the other programs and see if you qualify.

So what this means is that in order to max out your basic CESG amount, you need to contribute $2500 a year. If you miss a year of contribution, you can catch up in subsequent years, but you’ll have missed out on the compounding effect of having that amount invested, so it’s better to start early and be consistent if you can afford to do so.

So let’s say we started right away once a child’s born, contributed $2500 a year each year to get the maximum CESG, and kept going until we hit the $7200 CESG lifetime limit. How much would this account be worth by the time Little Matchstick is ready to apply for uni?

YearBalanceContributionCESGROITotal
1$0.00$2,500.00$500.00$0.00$3,000.00
2$3,000.00$2,500.00$500.00$180.00$6,180.00
3$6,180.00$2,500.00$500.00$370.80$9,550.80
4$9,550.80$2,500.00$500.00$573.05$13,123.85
5$13,123.85$2,500.00$500.00$787.43$16,911.28
6$16,911.28$2,500.00$500.00$1,014.68$20,925.96
7$20,925.96$2,500.00$500.00$1,255.56$25,181.51
8$25,181.51$2,500.00$500.00$1,510.89$29,692.40
9$29,692.40$2,500.00$500.00$1,781.54$34,473.95
10$34,473.95$2,500.00$500.00$2,068.44$39,542.38
11$39,542.38$2,500.00$500.00$2,372.54$44,914.93
12$44,914.93$2,500.00$500.00$2,694.90$50,609.82
13$50,609.82$2,500.00$500.00$3,036.59$56,646.41
14$56,646.41$2,500.00$500.00$3,398.78$63,045.20
15$63,045.20$1,000.00$200.00$3,782.71$68,027.91
16$68,027.91$4,081.67$72,109.58
17$72,109.58$4,326.58$76,436.16

$76,436.16. That sounds pretty impressive, but it gets even more impressive when we add up where all that money came from. $7200 came from the government, and $36,000 came from our own contributions, yet the ending balance is $40k more than what we put in! That means that the majority of that money came from investment gains, all compounded tax-free over 17 years.

This also means that when it comes time to pay for our child’s education, we’ll be able to do it at a greater than 50% discount, since we’ll have $76k to spend, but it only cost us $36k to get it. That’s a fantastic deal, and we know a thing or two about fantastic deals!

Now, how should we invest this account? Because this money isn’t meant to finance our FIRE lifestyles, it should be managed separately, with its own asset allocation and everything. And because this account is earmarked for a very specific expense with an explicit timeframe, a target date fund would be an excellent choice. Just figure out when our kid enters university, buy a target date fund for that year, and we’re done!

That being said, I’m a little weird in that I actually like managing these accounts, so while a target date fund would be a perfectly reasonable choice for most people, that would also take away the fun of doing it myself, and we can’t have that, can we?

Little Matchstick should enter university at age 18, and undergraduate degrees take 4 years, so our goal should be to have this account be 100% fixed income by that last year. So keeping that in mind, here’s the allocation schedule we’re planning.

AgeEquityFixed Income
190.00%10.00%
290.00%10.00%
390.00%10.00%
490.00%10.00%
590.00%10.00%
690.00%10.00%
790.00%10.00%
890.00%10.00%
990.00%10.00%
1090.00%10.00%
1190.00%10.00%
1290.00%10.00%
1390.00%10.00%
1480.00%20.00%
1570.00%30.00%
1660.00%40.00%
1750.00%50.00%
1840.00%60.00%
1930.00%70.00%
2020.00%80.00%
2110.00%90.00%
220.00%100.00%

Or to put that into a pretty chart…

We’re going to start at an aggressive 90% equity/10% fixed income allocation. Then we’re going to keep it that way for 13 years. That will give us a pretty solid chunk of time spent at an ultra-aggressive investment posture. Then, once he hits 14, we’re going to sell off 10% of our equity allocation and assign it to bonds, and we’re going to do that every year until we’re at 100% fixed income just as he exits undergrad. If there’s anything left over, he can use it for grad school, but our goal is to mostly empty out the account by then.

529 plans

Let’s talk about the American system.

The basic rules of the 529 plan are that it’s a tax-advantaged plan where investment earnings are allowed to compound tax-free, and when withdrawn for educational purposes, those withdrawals are tax-free as well. Unfortunately, that’s where the simple part ends.

Now, I’d love to write an article that goes “This is how a 529 plan works, and this is how you use it!” but maddeningly, I can’t. 529 plans are administered by each state rather than the federal government, so the mechanics of 529 plans are literally different for each state. Some states have great 529 plans, some states suck, and one state (Wyoming) doesn’t have 529 plans AT ALL. It’s nuts!

There is no universal grant or incentive for contributing to a 529 plan. Some states offer deductions for state taxes, so in these states like New York or Colorado, you would get a tax break depending on your income level. But many don’t.

This means that unlike the RESP, it’s not always a good move to open a 529 plan. Funds in a 529 plan are supposed to be used for education, but if your child doesn’t end up going to college, you’ll get hit with taxes and penalties when you try to get your money back out. Without an up-front benefit, you’d be giving up choice in how you use this money without getting anything in return.

This is exactly the scenario that our friend Jeremy from GoCurryCracker found himself in. At the time he had his first kid, he lived in a state that didn’t offer any tax deductions for his contributions, and concluded that by strategically harvesting capital gains over time at the 0% LT capital gains tax bracket, he could effectively achieve tax-free growth in his taxable account while not sacrificing any control over his money. Read his analysis here.

So whether it makes sense for you to use a 529 plan really depends on the state you live in. Vanguard created a really useful interactive map you can use to look up each state’s 529 plan, and they even included a simple tax calculator that lets you type in your income and it figures out what tax benefits you would get by contributing. Check it out!

Conclusion

So now that we have a freeloader child, I guess we have to start actually including him in our financial planning. And the first step is opening up an RESP, putting in the first $2500, and continuing to put that same amount in every year to max out our education grant.

How are you saving for your child’s education? Are you doing anything differently? Let’s hear it in the comments below!


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42 thoughts on “Saving for Our Kid’s Education with the RESP”

  1. Statistically, if one has the means, the most optimal strategy for an RESP is to front end the maximum amount ($50,000) at the very beginning, only get one CESG payment for that first year, and invest in an aggressive equity ETF. The tradeoff is not qualifying for free money in the form of CESG in subsequent years, but the compound growth of the large initial amount more than makes up for it, given the large time span of approx 18 years. This strategy makes sense if you already maximized other registered accounts, are debt-free and have the money to spare. This is an important principle because sometimes the allure of “free money” can actually work against you – If you have the ability to contribute more, I would say do so, and don’t let “free money” be the sole motivator.

    1. Oh, that’s an interesting idea. Or…OR…check this out…

      If you have the means to have $50k lying around, why not invest it in a TFSA, and then gradually over time transfer it $2500 per year into the RESP. That way you get the tax-free compounding over the entire amount, PLUS free money!

      1. It was assuming your other registered accounts were already maxed out.

        There is another way to front load it though. The max contribution is $50k, and you only need $36K to max out the CESG. That leaves you $14K you can use to front load it.

        I also do the 90/10 (with the 10 in preferred shares), and assumed 7% average return, and have it projected as $141K current when she is 17.

        FYI, an interesting post would be how to wind down an oversized RESP in the most tax efficient manner possible. I am pretty sure I am going to have to flirt with some gray areas to fully wind down the RESP unless she wants to be a doctor.

  2. Great post. I’m doing a very similar thing for my two kids: maxing the RRSPs every year, collecting the grant for as long as I can, going for growth early on and planning to dial back the equity allocation as they get older.

    Do you think $76k will be enough for 4 years of undergrad in 18 years time? What if $76k is too much? Is there an optimal withdrawal strategy if that’s the case?

    Are you planning on giving them control of the investments at some point? I.e., let them take the wheel for a bit?

    This is a HUGE life change for you guys on your FIRE journey. I’m really looking forward to blog posts how your FIRE life has changed and what changes you’re planning on making to your finances and nomad lifestyle!

    Oh, and congrats!

    Liam in Toronto

    1. I recently heard about a 40 year old who has maxed out his TFSA and RRSP contribution room so opened a RESP for himself. He will not be able to benefit from the government contribution but will get the tax break now. He has no plans to go to school but will instead roll it over to his RRSP when he goes FIRE and has room . Any thoughts on this crazy idea ?

      1. I’ve never heard of that before.

        So this strategy would be to open an RESP, stick $50k in, let it compound, and then later transfer it to your RRSP? Why not just contribute to the RRSP directly?

        I guess this gives you $50k of RESP room, but in order to spend it you’d have to burn up RRSP contribution room, then withdraw it. I’m not sure how that gets you ahead…

    2. Hey thanks Liam!

      What if $76k isn’t enough? Then I guess I’ll have to find more money elsewhere (or make the freeloader get a job and pay for it) but at least the first $76k would be heavily discounted.

      As for if it’s too much, you can withdraw it from your RESP and avoid the penalty by rolling it into your RRSP. It’s a little complicated and you have to have RRSP contribution room available, but it’s an option.

      1. There’s an even easier answer; if it’s too much, spend it on other things (including other investments, of course). The plan is for education but there’s no obligation to spend the money on anything in particular. It’s simply being in higher education that lets you get it out of the RESP. Once you have it, do what you will.

  3. Great post
    In Toronto where we live the govmt gives you money for having a kid. It used to be called the baby bonus. Not sure what it’s called now as my wife takes care of it. Anyway we were lucky enough to be able to put that money into RESP which was using govmt money to contribute and get more govmt money and in the end the system really worked to our advantage. If you can use this money in this way and not have to use it to survive like rent or groceries, it’s a nice way to get a jump on savings for schooling for your kids.

  4. Hi Wanderer – What are your thoughts on the $50k limit for the RESP contribution compared to the $36k limit for the Canadian Education Savings Grant? You potentially could have your first year’s contribution at $16.5k and not miss your CESG benefit over the next 14 years.

    PS: I enjoy this blog and am excited to see the content you’ll provide related to your young family. I would be interested on your thoughts about the cost of raising children. The Globe and Mail ran an article in October related to this and citing a study from Stats Canada – I hope that you and Firecracker comment on this study and present what your expected costs of raising your child will be.

    https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-expect-to-spend-more-than-350000-to-raise-a-child-in-canada-statistics/

    1. Hey @Hiker

      We’re another FIRE family in Canada with 5.5 and 2.5 year olds. We’ve been tracking how much we spend on them per year and it’s greatly under these figures provided by large media outlets. Here’s more details on our spending if you’re interested in reading more

      https://modernfimily.com/category/parenting/

    2. Hiker, We did exactly that. We contributed about 16.5/17K in the 3nd year for 1st kid and same amount for 2nd kid in 1st year I think and still go the grant. We would have loved to do what John Lee suggested however did have $100K laying around. The growth can be pretty substantial. We were way too conservative with the portfolio initially but have been very aggressive lately. Our 1st child is going to university in 2024 so we have cash out enough to cover her expense for 2-4 years depending on where she goes, etc.

    3. The main value of the RESP is access to the CESG. In exchange, this money has to be spent on your kid’s education or you get hit with a withdrawal penalty. That’s a good bargain, but without the CESG I’d rather invest that money in my TFSA, which has the same tax-advantaged characteristics without the restrictions. So I don’t see much value in putting any more than $36k into the RESP.

      And thank you for the study on cost of raising kids! We are collecting spending data right now so we can compare it to the studies for exactly this reason. Stay tuned!

  5. Welcome to the world of RESPs! Just a note to one of your sentences – if your kiddo decides not to enroll in any sort of post secondary training by the time they turn 35, the tax penalty is applied to the gains only not your contributions (and the gov takes back its $7,200 CESG contributions since those were meant for educational purposes).

    We too are planning to max CESG payment by contributing $36k into our kids RESPs. But staying more aggressive at a 100% equities ETF vs 90/10.

  6. Just a thought based on my observation of the plummeting bond market in recent years. As you approach the end of an investment time horizon, it makes sense to transition not just out of stocks into bonds, but out of bonds into high-interest savings.

    1. out of bonds into high-interest savings??? Yeah like you’ll find high HYSA yields if bond yields are low…they are 99% corelated man

      1. What do you mean? Over the last 2 years, interest rates were rising as bond prices were dropping. My point is about eliminating risk (stocks = high risk, bonds = low risk, cash = no risk).

    2. We decided to do just that. We moved most of our kid’s RESP over into a 5 year GIC this summer when we could still get a rate over 5%. Our kid is 5 years away from starting university and I wanted to take away the sequence of investment risk. Right now we had enough in our kid’s RESP to pay tuition for 4 years of university as long they stay within the province. Am I potentially leaving money on the table by moving to fixed income vs staying in the market? Yup. Sometimes playing it safe is ok, why take additional risk if you don’t have to.

    3. Yeah, right now when HISAs are paying 5% and the bond market is paying 3.5%.

      But I get your point. “Bonds” is a placeholder for whatever fixed income product is a good deal then.

  7. Starting in 2024, up to $35,000 in unused 529 education funds may be rolled over into a Roth IRA in the beneficiary’s (student’s) name. Annual IRA contribution limits and other limitations apply.

    The SECURE 2.0 Act, which became law in December 2022, changed the 529 account rules to allow up to $35,000 to be rolled over into a Roth IRA. The change will begin in 2024.

    However, Robert Farrington, founder of The College Investor, said the rules are very strict.

    “It is only for the beneficiary, not the account owner. However, you can change the beneficiary on these accounts,” explained Farrington. “So, let’s say you have more than $35,000 in the 529 plan. Then you change the beneficiary, and you can put it into another child, or the beneficiary could actually be yourself.”

    It’s important to note that you still have to abide by the Roth contribution limits, which are $6,500-$7,500 per year. So, it might take five or six years to move all the money into the account.

    1. That is very interesting. I knew about the $35k Roth IRA conversion option, but the idea of changing beneficiaries to get more money out is very interesting.

      The IRS might weigh in on this strategy, but it’s still interesting…

  8. My daughter is dual US Citizen.
    For RESP over 7 years we’ve put in about 45K and will take advantage of CESG for another 3 years.
    With GIC over 5% we’ve put about 1/3 in compound GIC for 4 Years . Take advantage of the untaxed interest accumulation. Other 2/3 is in RY, FTS, ENB, MFC, BCE stocks .
    Also being US citizen she can open US Savings bonds so we’ve maxed out I-bond and EE bond every year. Every year she can put in US$ 20,000 into both . These are untaxed until cashed in 18-20 years .

      1. Thanks we looked into that. Wife who is non US citizen holds RESP. Eventhough daughter is US citizen she may be taxed as beneficiary when money is taken out, however as daughter’s income will be low as student, and with personal tax exemption, she won’t pay any taxes on withdrawals

  9. Americans also have the option of Educational Savings Accounts (ESA). They are limited to a contribution of $2K per year, but you can pick and choose the investments and don’t have to worry about a specific state. Think of it has the IRA of college savings.

  10. We opened a 529 (NY) account in the year our daughter was born and put 100% into equity (S&P500 index). We never lived in NY but liked the plan. You are not limited to the state plan you live in. During Trump administration, rules changed so that you can withdraw up to $10k/year for K-12 private school. Despite tuition withdrawals in the years that market is up, overall balance is well above our initial deposit 11 years ago. Don’t forget, grandparents and friends can also contribute to your child’s 529 account. Unfortunately, Americans are weird about gifting money and asking for 529 contribution in lieu of a gift would probably be frowned upon (although, I’ve been tempted to try).

    1. Great point about opening plans outside your home state. Though my understanding is that you can’t get tax benefits if you don’t live in that state.

  11. Nice posts! I’ve learned a bunch about investing for kids. Even though I don’t plan on having kids, I wanted to drop a comment just because.

    You talked about moving from Equity to Stock. What do you think about Bonds lately? They didn’t do better than stocks when the market went down. Is that a risk? Have you thought about putting money in a settlement fund? The interest rates are good right now, about 5.3% in the USA this month.

    Congrats on your new baby!

    1. Thanks Mr. NN! “Bonds” are a placeholder for whatever fixed income instrument actually looks good at the time (i.e. 14 years from now). Bonds have been sucking lately, but I’m totally open to HISAs, preferred shares, REITs, etc.

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  13. Great post. My kids are EU citizens so they can access university for free, or almost, but still have to cover living (in case too far to commute) and other expenses and there are no “dedicated” systems like 529 or RESP, at least as far as I know.

    Congratulations on your new baby 💕!!

  14. Great post! We have a toddler and decided to try to invest the full $50k in her RESP. We made a lump sum contribution of $16,500 the first year and will do $2,500 the following 14 years. The strategy is to contribute the largest amount upfront while still maximizing the CESG received.

  15. Don’t forget about the $50,000 max. Before setting up informal trusts for your child, to pass along extra money its the most tax-efficient.

    Also if your child’s account is too successful, you are always allowed to withdraw/return all your contributions without tax impacts.

    Also when your child withdraws for education make sure to withdraw all grant money and interest before contributions.

  16. That’s an interesting point. I hadn’t considered the RESP from an estate planning scenario.

    My fear about estate planning, though, is this…What if the kid turns out to be a dipshit?

  17. Note also that some provinces in Canada have their own parallel one-time plan. In British Columbia it’s called the BCTESG – “BC Training & Education Savings Grant”. Some – but not all – provinces have something similar. The BC one is a $1,200 grant that goes into a regular RESP – it has to be claimed once the kid turns 6 and before they turn 9. The rules are different in other provinces. No matching required, just free money.

    The problem I found though is that the “smart guy/gal” brokerages like Questrade won’t accept it – only the “dumb-money” companies like CIBC/RBC – but it’s free money so just put it into the lowest-cost stock fund they have and leave it there.

    Very few people seem to know about these provincial schemes. Whenever I read anything in the media or blog posts about RESPs they never mention these things.

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  20. We’re funding five RESPs for our grandkids, here’s our investment risk schedule:

    0-7 -> VEQT (100/0)
    8-10 -> VGRO (80/20)
    11-12 -> VBAL (60/40)
    13-14 -> VCNS (40/60)
    15-16 -> 1/2 VCNS (40/60) and 1/2 to cash/laddered GICs
    17-18 -> 100% to cash and laddered GICs

    If anyone has any suggestions to improve on this, please share. Thanks

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