Why can’t people understand RESPs?

For some reason, parents around Canada are mystified when it comes to opening and managing a RESP account for their children. Before they even have a baby they start getting calls from official sounding companies that practically sound like the government. They are offering you a 20% return (guaranteed!) on your deposits.

They are not lying.

What they are not clarifying is that their organization exists to get a cut of that 20% and money that you put in. This is free (well, tax payers) money and everyone wants a cut at it.

You don’t have to go with these organizations. You don’t even have to open the account today. Or before their birthday. Or in the first year. None of that. (There are exceptions if you receive additional grants from the government for your children, but we do not.)

The government will match upto 20% of the first $2500 you put in, per year, until the kid turns 17, upto $7200. Which means they are really only matching for 14.4 years or up to $36,000 of your contributions.

We didn’t open our kids RESP until they turned 2. The first couple of years are hard on parenting — maternity leave, increased expenses, etc. For us it was also a new house and a new car. Now for as long we contribute until our children’s 16th birthday (and then some after), our children should receive the maximum grant possible for our family.

We put aside $208/month per kid in a TD Mutual Fund e-series account. This account carries no “account setup” or “activation” or “admin” or any fee. You hold funds in it. The funds have low fees. They are index funds. The math works out pretty well and is a popular couch potato strategy.

My husband and I hold different views on whether we should fund our children’s education. His parents didn’t fund his. My parents did. Naturally, we both want to do what our parents did. His arguments were:

  • Kids don’t learn the value of money if we give them handouts so early in life.
  • They won’t value education as much.
  • They are more likely to go for a degree with which they would be unable to live a life of financial freedom.

On the flip side, the arguments are:

  • We are saying no to free money. This is not fair to our kids.
  • Since OSAP etc. look at financial situation of the parents, our kids will be ineligible for many grants and loans.
  • Whether or not we like it, the society expects us to pay for our kids and tax benefits are provided keeping that in mind.

Ultimately, we “agreed” with opening RESPs for our kids under the following conditions:

  • We get to keep our principal payments (this is *our* after-tax money).
  • Kids will contribute to their RESP when they have the ability to get a job or have income.
  • Kids will keep the grant as well as the interest on the grant.

This was a compromise for my husband. He feels cheated out of the interest on his $36,000 (per kid!), but it is a little more fair for our kids. The interest payments and the grant leaves each kid with ~$20,000 for education (assuming 3% return, which is rather modest).