RESP question

[sabad66]

This quote is hidden because you are ignoring this member. Show Quote

Thats kinda harsh.
Perhaps I can clarify my position.
The two point question I was posting was to gain a understanding as others had posted a different viewpoint which in turn my posting may be incorrect.
skandalouz was kind enough to reply.
The two institutions I have worked at operated on separating the two. There is a shit ton of paperwork when opening a RESP. Hence I am interested in understanding in how it differs in ones own investing account.



In a standard account, funds are taken from different parts. To give context. A few months back I spent a shit amount of time helping a client's child withdraw funds for her education and making sure the institution did not screw her over. The institution HQ even got these numbers wrong and I had to correct them, I am no means a expert.
hence my curiosity to understand if you can put the cash together. Then why the institutions are so focused on separating the two and making my old job hell?

My understanding is am RESP is essentially 3 buckets even though you only have one balance available and showing to the end user:
- principal (your contributions)
- grants (gov’t contributions)
- investment income (= total balance of account - grants - contributions)

Now that I think of it, I suppose you would want to use investment income and govt grants first because if there is anything leftover (I.e you have 50k in it but kid only needs 40k for education), then principal has no consequences whereas the others do (tax and payback to gov’t).

I’m not in a position to withdraw yet so I’m curious now how they decide which bucket you are withdrawing from. Would hope that it’s just a simple priority of investment income, govt, then principal but maybe not?

[kenny]

This quote is hidden because you are ignoring this member. Show Quote

Can someone knowledgeable please settle this? Are there restrictions on the types in investments you can buy with the government grant portion of an RESP?

I had a quick google and couldn't find anything definitive. But I swear that was a factor when I set up the RESP for my kids.

There used to be a grant from the AB Govt (ACES) that was cancelled in 2015 which was a one time $500 grant and there were restrictions on that. The Canadian Learning Bond, also $500, might have similar investment restrictions as well but I didn't qualify for that so not sure.

The 20% matching grant (CESG) has no restrictions at all.

[ExtraSlow]

This quote is hidden because you are ignoring this member. Show Quote

There used to be a grant from the AB Govt (ACES) that was cancelled in 2015 which was a one time $500 grant and there were restrictions on that. The Canadian Learning Bond, also $500, might have similar investment restrictions as well but I didn't qualify for that so not sure.

The 20% matching grant (CESG) has no restrictions at all.

Hey thanks, that's probably what I was thinking of, and I have no doubt the bank "simplified" their explanation to say that all the government grants had that restriction. I'm sure I have the ACES money in mine, so I assume that restriction remains.

[dezmarez]

Since the ACES has been discontinued, those funds are now considered "accumulated income" and can be moved into a Self Directed account, and purchase whatever investments you want. (assuming they aren't locked into a GIC at the moment)

As far as the information above, it wasn't necessarily an "investment restriction" it was more so, did the promoter (Bank) accept that specific type of account in their RESP's.

For example, if you went into a TD bank while the ACES grant was available and wanted to buy mutual funds, TD Asset Management accounts, did not accept this grant in their accounts, however, TD Canada Trust could apply and hold this grant in their account. Unfortunately, the only type of investment you could purchase in a TD Canada Trust RESP is a GIC.

People working at the banks, typically don't understand this in detail, and just frame it as "you can't buy investments with these grant funds".

Also, if you had a promoter that accepted all the grants, and wanted to move them to a promoter that didn't, those transfers would not be able to take place. These rules have since been relaxed a bit.

Most promoters have updated the grants they can receive, and are fairly flexible in taking them all in. Particularly Direct Investing, regardless of institution. It wasn't always the case. You can actually check out the list below and see which grants are accepted.

In my above example, you can see the difference between "The Toronto Dominion Bank" and "TD Asset Management Inc (which is who you technically purchase a mutual fund from in a branch)". One can accept all the grants, the other only accepts the CESG.

https://www.canada.ca/en/employment-...rs-list.html#B

As for how to withdraw funds when the time comes when your children are going to school, 100% EAP (Grant Plus Accumulated Income, taxed in your kids hands) first before anything else. Keep in mind there are restrictions on the first withdrawal in their first semester.

[tonytiger55]

This quote is hidden because you are ignoring this member. Show Quote

My understanding is am RESP is essentially 3 buckets even though you only have one balance available and showing to the end user:
- principal (your contributions)
- grants (gov’t contributions)
- investment income (= total balance of account - grants - contributions)

Now that I think of it, I suppose you would want to use investment income and govt grants first because if there is anything leftover (I.e you have 50k in it but kid only needs 40k for education), then principal has no consequences whereas the others do (tax and payback to gov’t).

I’m not in a position to withdraw yet so I’m curious now how they decide which bucket you are withdrawing from. Would hope that it’s just a simple priority of investment income, govt, then principal but maybe not?

Im kinda curious on that part too if you are self directing. Lets take the following scenario.

Lets say the parent invests $10K + $5k gov grant (Im making up the gov grant amount for the sake of a simple example). So total is $15k in the RESP. They then buy Suntan angry investments LTD. The investments grow to 20k as its a aggressive fund.

Lets say the child decides to do law, but they mess up and get a B- on their homework instead of a A+. The parent pulls a Suntan move and tells them they dont know shit and tells them to give up their dreams. So the child gives up their dream of higher education.

RESP Funds are withdrawn. How much of the gov grant goes back..? Is it $5k, or 5K plus the growth..? Now the purchasing power of of 15k is higher than 10k? Does the parent profit from the growth during that period after using the gov grants?

Lets add a bit more spice. Let say there are three kids. Middle child decides not to go into higher education. Elder and youngest do. How are the grants for the middle child calculated to be paid back, if they have to?

Lets say Suntan Investments dont do well or hit a bump and the investment drops to 9k? The child does not go to University. How much of the grant is paid back then..?

Or is it just kept simple...its all done as a non educational withdrawal and the tax is paid..?

[dezmarez]

There are essentially 3 types of withdrawals from an RESP:

EAP Education Assistance Payment
This amount is taxable in the beneficiaries hands (your kid) and is made up of Government Grant and Accumulated Income
PSE Post Secondary Education Payment
This is the amount you put into the RESP and can be withdrawn tax free
Non Educational Capital Withdrawal
This is when you take funds out if your kids don't go to school. This would cause you to have to repay government grant money, if they are in the plan.


Essentially, you would want to do the EAP first (It's restricted to $5,000 for the first 13 weeks of enrollment, nothing after that).
Kids would be taxed on it, however, typically they aren't going to be in a large tax bracket.


Benefit is, there are no limits after the first 13 weeks, so technically you could do a massive withdrawa in year 2l for whatever, as long as they are enrolled.

As far as the order to take, this is really up to you (or you and your advisor) to discuss and determine how to process the withdrawal.

If you have a Family RESP, siblings can share the grant money and accumulated income. So, if one of the three doesn't go to school, the other siblings can use the funds.

Also, keep in mind, RESP's can stay open for 35 years, so if your kids don't go to school right out of High School, they can stay there while they figure their lives out.

These things are actually a hell of a lot more complicated than you would think.

For example, kid goes to university, you didn't realize you should take the EAP first. You withdrew all your contributions first, and left all the grant money in for later. Kid decides he isn't going to go back to school. That grant money can be tied up in the RESP for quite sometime until you can withdraw it under the Accumulated Income Payment.

Then this would be taxable as income to the parents at their marginal tax rate plus an additional 20% penalty, but you could shelter this if you have RRSP room.