hey guys it's Adrian here the Canadian in a t-shirt and today
i'll be breaking down what is an RESP how to invest in an RESP
and how to maximize this free government money to finance your children's
education i'll go over the benefits of the RESP
the rules and limits to follow the government matching grants and at
the end i'll talk about the best strategy
to maximize your long-term growth in part two of this series
i'll talk about how to withdraw from your RESP and
what happens if your child decides not to go to school so stay tuned for that
the RESP stands for the registered education savings plan and it is one of
the most important but underutilized tax sheltered accounts
in canada along with the TFSA and RRSP which i've
talked about in the past this video is the fifth chapter in my
canadian tax guide so i'll be assuming that you have a basic understanding
of taxable income tax brackets marginal tax rates
and i'll be comparing the RESP to the TFSA
and the RRSP if you need a refresher on these tax basics
click the pop-up at the top right to check out all the videos in my canadian
tax guide playlist and then come back to this video the
tfsa and rrsp are the two main tax sheltered accounts
in canada that are available to all canadians but the RESP the
registered education savings plan is designed to help fund post-secondary
education and it is only available to Canadians with children unfortunately
the majority of Canadian parents are not taking advantage of the RESP and
so they are missing out on thousands of dollars of free money
for their children i don't have any kids yet but the day
after my first child is born i'm opening up an RESP and i'll show you
exactly how to get the most out of this tax sheltered investment
gift just like with the tfsa the RESP's name is misleading it's
called the registered education savings plan
but it should not be used as a savings account the RESP
should be used as an investment account investing in an RESP
gives you two main benefits free money from the government
and tax sheltered growth first the government will match 20% of
the contributions you make to an RESP up to a certain limit which i'll get to
these grants are free money from the government
and it guarantees at least a 20% return on your investment that's amazing the
second benefit is that the RESP is tax sheltered so any
income you earn inside the RESP will not be taxed so any dividends
interest or capital gains you make will be tax-free and so your investments
will grow much faster inside an RESP than they would in a
non-registered account the tax sheltered nature of the RESP is
very similar to the TFSA your RESP is a large umbrella where you
can hold stocks bonds ETFs mutual funds GICs
REITs and cash as long as these assets remain inside an RESP
you won't be paying any taxes on them stick around to the end of this video
where i'll share my strategy on what kind of investments to hold to
maximize this tax-free growth just like with the TFSA
your contributions are made with after-tax dollars so you cannot use your
RESP contributions to deduct your taxable income like you can with an RRSP
you might be thinking why bother investing in an education fund
well consider this the average cost of university in canada including tuition
living expenses and textbooks is between ten thousand
and twenty thousand dollars every year per child for a four year program
you're looking at eighty thousand dollars where do you get this kind of
money? using an RESP if you contribute
$2,500 every year for fifteen years to maximize
the free government money by the time your child is 18 years old
and ready for college you'll have over $85,000
saved up for your child and more than half of that money
didn't even come from you it came from the government matching grants
and the tax-free growth that's the power of an RESP
i'll get into the details of this example later in the video the RESP
offers some amazing benefits for canadian parents but there are a few
rules to follow an RESP has to be opened on behalf of a
child which is the beneficiary you can't open an RESP until your child
is born and until your child has a social
insurance number or SIN and just like the TFSA there is a
limited amount of contribution room otherwise you just keep putting your
investments in and never pay any taxes you are allowed to contribute a lifetime
maximum of $50,000 for each child in an RESP this
$50,000 limit only applies to the money that you
put in it does not include the government grants
or the income you make from the investments and like a TFSA
if you exceed this fifty thousand dollar limit you will pay a penalty
of 1% every month on this excess amount
if you're not careful this will cost you 12% every year
this is huge so please keep track of all contributions you make
especially if multiple family members are contributing there's no limit on how
much money you can contribute each year you could put in the full 50,000 limit
on day one but don't do that because it will limit the amount of free government
money you get later in this video i'll show you just
how much to contribute each year to maximize this free government money
you don't have to start contributing right when your child is born but you
should start as soon as possible and that's because the government will
stop matching your contributions at the end of the year that your child
turns 17. so you want to make sure that you maximize the free government
money before your child's 17th birthday even though the grants end
at 17 you can keep contributing to the RESP for the
tax sheltered growth until the 31st year since you opened the account by 31 your
child is probably done school but if not you're actually allowed to keep an RESP
open for 36 years so your child can decide to go to school
in their mid-30s and still use that money that you invested
let's talk about the fun stuff the free government money the money you
contribute to an RESP will grow tax-free but on top of that
the federal government will also add money to the RESP
through the Canadian Education savings grant or CESG
this grant is an incentive for all parents and families
to save money for their child's post-secondary education no matter what
your income is even if you're a millionaire
the government will match 20% of your RESP contributions
up to $500 per year per child so if you contribute a thousand dollars to your
child's RESP this year the government will add an additional 20%
or two hundred dollars for free if you contribute twenty five
hundred dollars this year you will gain the maximum amount of five hundred
dollars in grants this year the government won't match anything
above twenty five hundred dollars that's why
you shouldn't contribute your entire fifty thousand dollar limit all at once
there is an exception to this if you missed an RESP contribution one year or
you invested less than $2500 in a previous year that
means that you have unused grant room and you can carry
forward this grant room and earn up to a thousand dollars in a given year this
allows you to catch up one year at a time here's an example
every year i contribute $2500 to my child's RESP and so every year i
gain $500 in government grants but on my child's
fifth birthday i lost my job and money was really tight that year so
i couldn't afford to contribute anything to the RESP that year
for that year i have $500 of unused grants
the government won't match you if you don't put any money in so now next year
i get a new job with a bigger salary and now i can catch up for that missing
year so if i contribute twice as much so five thousand dollars into the RESP the
government will give me the usual $500 grant plus the $500 of unused grants from
last year in this way i can make up for that
missing year but you can only make up for one year at a time
you can't contribute ten thousand dollars to make up for four years all at
once there is a lifetime limit to the CESG
grant money of seven thousand two hundred dollars
per child that's seventy two hundred dollars of free money from the
government available to every child in Canada as
long as you make the contributions to their education fund the CESG grants are
available to everyone regardless of your income but there are
a few additional programs to help out lower income families
everybody earns that extra 20% of grant money up to $500
per year but if your household income is below $95,260
this maximum limit is increased by $50
so you can earn up to $550 a year in grants
and for lower incomes below $47,630 a year
you gain an extra hundred dollars for a total of six hundred dollars in grants
every year this is important this additional grant
money for low-income families does not increase your lifetime total
everyone can only receive a maximum of $7,200 in grants
but lower income families can reach this maximum a little bit
faster another program to help low-income families save for
post-secondary education is the Canada learning bond or CLB with
this program your child can gain an additional two
thousand dollars of free RESP money as long as your household income
is below forty seven thousand if your family has more than three kids
this income threshold increases there are also provincial education
grant programs if you live in Quebec Saskatchewan or British Columbia please
do your research and take advantage of these programs if you're eligible
education is expensive and every little bit helps also note that the Canada
learning bond and the provincial incentives
are completely separate from the CESG grants so they will not affect the $7200
lifetime grant limit or the $50,000 RESP contribution limit for the rest of this
video i'm only going to be talking about the
RESP benefits that are available to everyone
not just for lower income families so for everyone there is a lifetime maximum
of $7200 in grant money but remember the
government will stop matching your contributions
at the end of the year that your child turns 17. so you really want to maximize
this free money as soon as possible and here's how you
do it if you contribute $2500 every year you'll earn $500 of grant
money every year and do this for 14 years
at that point you will have contributed $35,000
into your child's RESP and the government will have given you seven
thousand dollars in grants now you only have $200 of grants left to
claim so in year 15 contribute a thousand dollars and you'll
get that final $200 of grant money at this point you've
maxed out the free government money you've received $7200 in government
grants and you yourself have contributed thirty six thousand dollars remember
you're allowed to contribute up to fifty thousand so you still have fourteen
thousand dollars of contribution room remaining but here's the thing
the RESP has two main benefits the tax sheltered investing
and the free government money you've now maxed out the free government money
so the only benefit left is the tax sheltered growth but you get this exact
same benefit from your TFSA and the TFSA is far more flexible the
money in the RESP should only be used to pay for
university or other post-secondary education but the TFSA has
unlimited options you can withdraw from the TFSA worry free
and spend it on whatever you like including your child's education so once
you've maxed out the government grants of $7200
i would suggest to put any remaining money into your TFSA instead
of course keep saving and investing for your child's education but once the
government grants run out it's better to put that money in a TFSA
instead of an RESP you just have more options. If your TFSA
is already maxed out then of course keep adding money to your RESP to take
advantage of that tax sheltering why pay taxes on your investment income when you
have tax shielded room waiting for you. So if your TFSA is maxed
out then add as much money as you can to your RESP to fill up that remaining
$14,000 of contribution room there's no reason to limit yourself to an annual
amount we only limited those contributions to
$2500 a year to get those grants but once the grants run out you can contribute the
remaining $14000 all at once the faster you contribute
the more time your investments will have to grow
tax-free okay so using the strategy how much can we expect to make in our RESP?
so each year we put in $2500 and the government gives us an
additional $500 and this is the fun part we earn tax-free investment income on
our money and the government's money so $3000 in
total we keep doing this and our investments keep compounding year after
year for 14 years in the 15th year we only
put in a thousand dollars and the government gives us the final $200
of grants so in 15 years we've put in $36,000
and the government has put in $7200. now we let this money grow for another three
years until our child turns 18 and is ready
for college let's assume an annual rate of return
of six percent which is pretty conservative for a stock and ETF
portfolio after these 18 years our RESP will have
almost eighty six thousand dollars inside we gained almost $43,000 of
tax-free investment income for doing nothing
just for investing the money and sitting back we gained a 20%
return from the government grants themselves plus a 100%
return from the tax-free growth we essentially doubled our money
and the government's money in 18 years this is the power of tax sheltered
investing accounts like the RESP of course this is assuming
that we stopped contributing after the grants went out if we kept contributing
to a TFSA or the RESP this final number would be significantly
higher if you want to play around these numbers i've included a link to the
Excel spreadsheet that i made in the description box below i get this
question all the time what accounts should i be investing in
first? Should i focus on my TFSA or my RRSP or my RESP?
i'll be making a whole video on this topic and i'll explore different paths
you should take based on different scenarios but for now
here's a quick answer first off you should pay down any credit card debt
or high interest debt that you have. That will give you peace of mind it'll help your
credit score and you'll avoid those massive 20%
interest rates working against you that's effectively a guaranteed
20% return on your investment and you can't beat that
second make sure you have an emergency fund this is money that you can rely on
to cover your expenses for a few months if you were to lose your job this
emergency fund is a shield to protect your investments so if anything
unexpected comes up you have the money to cover it without
being forced to sell your assets this is incredibly important and your
emergency fund should not be tied up in investments
it should be available as cash when you need it so keep it in a high interest
savings account to earn a little bit of interest along the way
right now my favourite high interest savings account in Canada
is the EQ bank savings plus account they offer two percent interest rates one of
the highest in Canada and this isn't a promotional rate for a few months this
is two percent all the time plus there are no everyday banking fees
no minimum balance required free e-transfers and free bill payments
if you'd like to get started with EQ bank click my referral link in the box
below to sign up there's no extra signup bonus for using my referral link but if
you do use it i will receive a small referral bonus so
you'll be helping to support my channel i've covered the importance of paying
off credit card debt and starting an emergency fund in detail
in one of my oldest videos the four steps to become wealthy so check that
out as well once you finish these two steps you're
ready to start investing and here's what i suggest
if you have children your priority should be to invest in their RESP
before you start putting money in your TFSA
or RRSP try to put in $2500 every year for each child
in their RESPs to take advantage of those government matching grants
those grants alone are a guaranteed 20% return on your investment
and on top of that you'll still get tax-free growth like you will in the
TFSA i know it can be hard especially if you
have multiple children but try your best to put in $2500
every year per child after the RESP grants have been maxed out
then you should focus on your TFSA and RRSP choosing between those two
is a huge discussion and i'll make a whole video just on that once you've
maxed out your TFSA and RRSP then come back to the RESP and max out
that $50,000 limit you won't be getting any more
grant money but you should still take advantage of the tax-free growth once
your TFSA, RRSP and RESP are all maxed out now
you're finally out of tax sheltered room and it's time to start investing in a
non-registered or margin account here there are no limits but you will be
taxed on any income you make through dividends or capital gains
so we know how much money to put into an RESP but what kind of investments should
we actually hold inside? The tax shelter nature of the RESP is
almost identical to the TFSA and so we should invest in the RESP the
same way we invest in the TFSA with Canadian high-yield dividend stocks
and ETFs i went into detail on how to invest in
your TFSA in my previous video so click the pop-up at the top right to check
that video out do not hold cash in a savings account in
your RESP at least not until you're ready to spend it with the savings
account you're wasting that precious contribution room
sure you're avoiding tax on the interest but a savings account will earn you at
best two percent of interest so you'd be saving a tiny amount of tax
on this two percent of income instead hold secure and establish blue
chip stocks and ETFs inside your RESP to gain much
higher passive income through dividends completely tax-free and don't hold risky
penny stocks in your RESP your children are relying on this money
for their education plus if your penny stocks crash
you will permanently lose this limited contribution room to your RESP
if you make a bad investment and you lose that money in your RESP you can't
put it back in it's gone forever your children will
need this money 18 years from now so make sure you invest in companies
that you know will still be around and still be successful also if your
stocks inside your RESP are currently down
don't sell them wait for them to bounce back as soon as you sell them
those losses become realized and now you've permanently lost that RESP room
and this is very important the RESP is tax-free for Canadian
dividends but not for US dividends if you hold
US stocks or US ETFs you will be charged a 15% u.s withholding
tax on these dividends even in an RESP or a
TFSA this 15% withholding tax is only waived
in registered retirement accounts like the RRSP so this is where you
should hold your u.s dividends for your RESP
hold Canadian dividend stocks and ETFs i've already made several videos on the
best canadian dividend stocks and dividend ETFs to hold in your TFSA
or RESP so make sure you check those out you can
open up an RESP account and start investing in stocks and ETFs
using Questrade which is my favourite online broker if you'd like to get
started with Questrade click my referral link the box below and
you'll get $50 in commission free trade rebates
for the first 30 days when you sign up that basically means that your first 10
stock trades will be commission free that saves you $50 plus i'll get a small
referral bonus as well so there you have it that's the first
half of everything you need to know about the RESP
the RESP gives you free money from the government and allows you to invest
tax-free to finance your children's post-secondary education you should
contribute $2500 to each child's RESP every year to
maximize these government grants and lower-income families can earn even more
you should invest in the RESP just like a TFSA hold high quality Canadian
dividend stocks and ETFs to maximize the tax-free growth
stay tuned for part two where i'll talk about how to actually withdraw money
from an RESP RESP family plans versus individual
plans and what to do if your child decides
not to pursue post-secondary education there's a lot to discuss
thanks for watching guys and be sure to like comment and subscribe
if you found this video helpful every thumbs up and comment really does help
me build this channel on youtube and hit that bell icon to be notified about new
videos every Thursday and if you like to follow
me on instagram or facebook @CanadianTShirt click the link in the
box below or click the links on my homepage be sure to tune in to my next
video on how to open a Questrade account and how to transfer money into this
account to start investing thanks everyone and i'll see you guys on the
next episode of the Canadian in a t-shirt bye guys