When we have children our previous lives end and our new lives begin. From the day they’re born we love them, care for them, want them to be happy all the time and dream of the life they will have and how we’re going to help them live up to their full potential and their success.
We have endless conversations and make plans on what they’ll be when they grow up and how we’ll make it happen. And then they grow up and begin making their own decisions and our plans for their future goes flying out the window. They will make their decisions and we’re only along for the ride. If you want to test my theory. Did you do what your parents wanted you to do when you were 18?
So what options do we the parents have when our children are brand new to the world and we start our planning for their future? A future we dream of full of success and happiness. What options do we have which will give them the freedom they’ll demand to make their own choices and not have them constrained by someone else’s rules who will decide their future for them?
What’s the RESP and what’s it for in a tech connected world without borders and limitations?
Until now parents were told by bank mutual fund sales people or group resp sales people that the RESP was their only option when saving for their child’s future. However, that’s not accurate. Today is 2022. Fifty years ago in 1972 the Government of Canada created a program called the RESP (Registered Education Savings Program) Marketed to parents as an Education Savings Plan by financial institutions.
Initially, the RESP was created by the Government to encourage and help parents to save for their children’s future post secondary-education, which back was mainly for local universities or community colleges to study white collar occupations. In 1972 next to parents never envisioned their child attending a trade or vocational school so the RESP was not even applicable if a child at 18 chose a career in plumbing, carpentry, building trades, hair stylist or any of the hundreds of other careers that were not taught at a university or community college.
From 1972 to 1998 the only financial benefit for parents who had the extra funds to open an RESP account was that any growth on their deposits in their RESP wouldn’t be taxed while it was growing until it was withdrawn.
As you can imagine. The RESP became very popular with wealthy high income Canadians who had plenty of investment cash available and whose main passion was avoiding taxes. For them the RESP was mainly a tax shelter for their investments.
In the 1970’s and 80’s when inflation and interest rates were high the average Canadian didn’t have extra cash lying around they could deposit into an RESP account.
What’s the Canada Education Savings Grants (CESG)?
To entice more families to invest for their children’s future post-secondary education, the Government decided in 1998 to create the CESG (Canada Education Savings Grant) as a carrot to get more families to open RESP accounts at their local bank.
Initially in 1998 the RESP program was simple and straightforward. Families who opened an RESP account would get 20% of whatever they deposited in their child’s RESP account each year up to a maximum of $400. So if parents deposited $2,000 in a single year they would receive a $400 CESG grant from the Government until the year their child turned 18. The maximum CESG grant parents received until 2008 was $6,000 if they deposited $30,000 into the RESP. Nothing more! The rest, parents would have to hope and pray the risk of investing for their child’s future education was entirely up to the stock market and their decisions.
The carrot worked great, and deposits at local banks exploded because of the CESG grants. However, by 2008 the cost of post-secondary education had begun increasing and to keep parents interested in RESP’s the Government decided it needed to sweeten the carrot to get people to continue to save in the RESP.
So they increased the total annual CESG grant by a whopping $100 A YEAR. That’s right! As the cost of education was skyrocketing, our government said – Let’s give parents an extra $100 a year if They increased their deposits from $2,000 a year to $2,500 a year. Parents would have to pony up an extra $500 a year to get a mere $100 a year more from the Government.
They didn’t give families more CESG grants. They gave more CESG grants if the family increased their RESP contribution. That meant if you deposited $2,500 into your child’s RESP account you would receive $500. That’s it. The rest was on your shoulders to manage the investments and take the risks. To get an extra $1,200 in CESG grants you had to deposit an extra $6,000.
By 2021 when the cost of a 4 year university education was approaching $68,000. The maximum RESP grant families got by the time your child was 17 would be a whopping $7,200 if parents deposited $36,000. That’s it, nothing more.
This worked great for all the banks and group RESP companies who were able to charge a ton of annual account and investment fees on over $50 Billion accumulated in RESP accounts, until 2016. Exactly 18 years from when the CESG grants were started in 1998. Why 2016? Well until 2016 no one asked the bank or group RESP company sales representative the hard question.
What are the rules for withdrawing from the RESP? How does my child access their RESP account?
Until then everyone was busy loading up the accounts for the banks to take all their fees and the investment advisors to take all their fees and the mutual fund portfolio managers to take all their fees.
The Government made it seem so easy and the bank mutual fund sales person and the group RESP sales person said to parents this was free money. No one at the bank or group RESP company told the parents how the RESP actually worked or of any of the rules and conditions for children to use their RESP when time came to have the money flow in the other direction.
And since parents weren’t told all the rules, conditions and restrictions no one asked, How do we withdraw from our RESP for our child’s education? What are the rules for using the RESP?
That August in 2016 when parents of the first 18 year old cohorts who began receiving the CESG grants as part of their RESP in 1998, now learned surprise. That was the moment parents began to learn what was hidden from them. The rules and restrictions of trying to withdraw from the RESP.
They began to learn the hard way that in order for their child to use the RESP their child had to select an education that was pre approved by the government of Canada at the time their child wanted to go to that university, college or vocational training program.
Allow me to share with you what that looks like.
As many parents and children learned in 2016 that the university, college and program they chose had to be on the List of designated educational institutions and if it wasn’t then their child couldn’t use the RESP and now began the painful task of trying to close it down and unwind it.
What happens when your child doesn’t qualify to use their RESP?
Now came the painful surprise the bank mutual fund sales person or the group RESP sales person or even the Government of Canada never told Canadian parents when they opened their RESP account.
What happens if their child chooses a different career path or educational program that doesn’t qualify for them to use the RESP?
As the parents, you will now need to being to close the RESP account. You can withdraw all the money you deposited over the years into the RESP account without taxes, since you paid taxes on the funds from your paycheck already.
You will be required to return all the CESG grants the government gave you, even if you or your advisor may have lost money on the stock market.
However let’s assume there were gains in the RESP account when your child turned 18 but couldn’t use the RESP for their future. You would only be able to withdraw the gains in the account when your child is 21, you as the owner of the account will have to pay all the income taxes on the gains at your tax rate and then the final surprise you will now have to pay another 20% penalty on the full gains in addition to the taxes. That’s right, a penalty for investing for your child’s future education in an RESP account. The Government giveth and the Government taketh away.
What options DO parents have to save for their child’s future that has NO Government control or bank rules and restrictions?
Before the RESP and for over 100 years parents in Canada had saved for their child’s future and education in a little know plan called Participating Whole Life Insurance plan which was mainly only available to Canadians through advisors. Unlike the RESP, Participating Whole Life Plans (Child Plan) was parents private investments for their children’s futures and therefore had no rules or restrictions on what children studied in life or did in life.
Child Plan is a Participating Whole Life plan and the only tax-free investment parents and grandparents can open for their children and grandchildren in Canada.
With a Participating Whole Life plan from the day the plan is opened their child and grandchild will receive a compounding tax-free annual dividend for life and not a simple government grant until they’re 18.
With the Child Plan, your child when has unlimited freedom to use the cash value of their plan for any education anywhere in the world, without any Government or bank restrictions or rules.
And if they have a scholarship or choose a different path, they don’t have to close it and start all over again, like the RESP. Your Child Plan cash value will continue to grow tax free and they can in addition to their education also use it to buy their first home or start their own business one day if that’s their dreams.
Child Plan gives your child unlimited options in life. No Rules or Restrictions!
To learn more about Child Plan, click HERE and request your personalized Child Plan Illustration and learn how it will set up your child for a future where they can pursue their dreams without restrictions.