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Is a Registered Education Savings Plan (RESP) The BEST Strategy For Funding Your Children’s Post-Secondary Education?

Compiled and written by George Roth, June 2023

George J. Roth

George J. Roth

Founding Partner & Independent Life, Accident and Sickness Insurance Advisor. Authorized IBC Practitioner

• 15 min read
Is a Registered Education Savings Plan (RESP) The BEST Strategy For Funding Your Children’s Post-Secondary Education?

Is a Registered Education Savings Plan (RESP) The BEST Strategy
For Funding Your Children’s Post-Secondary Education?
How about AND instead of OR?

RESP Benefits

There are two significant benefits to the Registered Education Savings Plan (RESP). First, there is the availability of government grants; the government will match 20% of your contributions up to $500 per year, to a lifetime limit of $7,200. The second benefit is the tax-deferred growth of the investments within that RESP. Although the income is taxable in the student’s hands when withdrawn, they are typically in a much lower tax bracket.

Side note: Where is the government grant money coming from? Our taxes!

The lifetime contribution limit for a RESP is $50,000 per beneficiary. To maximize the grant money you receive; you will need to contribute a minimum of $2,500 per year (20% of which is $500) over the course of 14 years and then $1,000 in the last year to hit that $7,200 grant ceiling. With these minimum contributions, you would have contributed $36,000 over 15 years.

If your goal is to maximize your RESP, you have another $14,000 of contribution room and although there is no additional grant available with respect to this amount, it still benefits from the second RESP advantage: tax-deferred (commonly tax-free) growth. To maximize that benefit, you will need to put that “extra” $14,000 into the registered account from the very beginning.

RESP Downsides

Having said all of that, we should also consider any downsides to the RESP program. The biggest downfall by far is if your child(ren) doesn’t attend an approved and accredited educational institution (government rules control what your child gets funding for). In that case, the grant money would have to be returned and any growth in the account would be taxed as income to the parent(s), with an additional 20% penalty.

What happens to ‘savings’ in a RESP when it closes/expires?

Any savings that remain in your RESP when it closes will be handled as follows:

  • money received from either the Canada Education Savings Grant (CESG) or the Canada Learning Bond (CLB) will be returned to the Government of Canada; and
  • any personal contributions in the account will be returned to the person who opened the plan.

The interest earned on both the personal contributions as well as any government grants or bonds will be returned to you if all of the following apply:

  • all children named in the plan are at least 21 years old and are not eligible for an Educational Assistance Payment;
  • the subscriber is a Canadian resident; and
  • the RESP was opened at least 10 years ago.

In this case, the money withdrawn is called an Accumulated Income Payment. When withdrawn, the money will be taxed at your regular income tax rate, plus an additional 20 percent. You may be able to reduce the taxes you have to pay by transferring your accumulated income from one RESP to another or to your or your spouse’s Registered Retirement Savings Plan (RRSP). This assumes that there will be contribution room available in any of these government-controlled plans. Upon withdrawal from any registered plan, the full amount will be taxed at your highest tax rate.

How RESPs are taxed

Child who continues education after high school.

  • Your money grows tax-free while it is in your RESP.
  • You do not get a tax deduction for the money you put into an RESP.
  • The money that your investment earns while it is in the RESP will not be taxed until money is taken out to pay for your child’s education.
  • Money paid out of the RESP as an Educational Assistance Payment is taxed in the hands of the student. Since many students have little or no other income, they can usually withdraw the money tax-free.

Child who decides not to continue education after high school.

  • You will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in your plan as interest. This money is called “accumulated income.” It will be taxed at your regular income tax level, plus an additional 20 percent.
  • The money that you have put into the RESP is returned to you.
  • The CESG can be shared with a sibling if they have grant room available —otherwise, the grant must be returned to the Government of Canada.

In summary, when you close your RESP, you will have to pay tax on the earnings and although there will be earnings on the CESG, the grant must be returned to the Government of Canada.

A second huge downfall of the RESP program, and arguably the #1 downfall, is that the money that is “saved” serves only one purpose. Once the money is used for secondary education (the best-case scenario) it is now gone, unable to be used for any other purpose. You have permanently and generationally killed the compounding – the proverbial golden goose is dead.

A third consideration with a RESP is the ability to save versus invest. As the name indicates, this is advertised as a ‘savings’ plan. However, the money is actually invested in a product of the subscriber’s choosing. The number one attribute of investing is that regardless of the vehicle or tool that you choose, your money is at risk of loss. There are no guarantees of growth, only predictions based on past performance, which has absolutely no bearing on the future. Your investments may grow, and they may be lost to market downturns and fees. Remember, your investment/fund manager gets paid no matter what. This remains the case in a self-directed fund, as well.

A fourth consideration is control. The RESP is a government-controlled program. Any government could change the rules at any time, which they have. Plus, once you give your money away for someone else to manage you have given up all of the control. Your money is in prison for 10 to 20 years, or more, and cannot be accessed without an enormous cost.

What about using another Vehicle to achieve the same goal?

There is no other product that can provide the living and death benefits that participating dividend paying Whole Life Insurance can provide. Life insurance by design, is not an investment, but rather a binding contractual agreement, which keeps your money safe and liquid so that you can use other people’s money without losing the growth on your own money. It is the financial tool that successful people have used for centuries to keep more of the money they make and stop losing money to taxes, interest, market volatility, management fees, and opportunity costs.

A properly designed participating whole life policy on the life of your child(ren) or grandchildren can provide a means to fund their post-secondary education. Remember however, it is For them not simply on them and it could provide so much more…

Advantages of Owning Participating Whole Life Insurance

  • Equity creation and ownership – providing ultimate Control for the owner. You are also a shareholder earning dividends, based on the profits of the Par account and/or the insurance company.
  • Premium rates are guaranteed to never go up. Flexibility can also be built-in so the owner can make changes to the amount and method of premium payment, anytime along the way.
  • Guaranteed lifetime death benefit, which when designed correctly, the tax-free payout of this insurance continues to grow each year. You get guaranteed lifelong protection that will be there when your family needs it most, creating an instant, growing, and permanent legacy.
  • Guaranteed and increasing cash values with uninterrupted compounding. Your capital is preserved, and your gains are locked-in, making this a stable, predictable asset that pays you – all built on a foundation of contractual guarantees.
  • Liquidity - cash values can be used at any time (within the administrative guidelines of the insurer), for ANY purpose, making this a Liquid asset.
  • Liquidity - cash values can be used as collateral for a loan at any time (within the administrative guidelines of the insurer), for ANY purpose. This allows for uninterrupted compounding. Your cash grows for the future AND you use it today! You also avoid the opportunity costs of paying with cash.
  • Growth in the policy is tax advantaged. Whole life policies are tax exempt products.
  • Provides guaranteed tax-advantaged (can be tax-free) income for retirement and long-term care needs.
  • Provides guaranteed tax-free income for beneficiaries (transfer of wealth).
  • Provides a guaranteed estate planning tool to pay estate taxes from the sale of other assets (deemed dispositions upon death).
  • Return on equity is better (often 400% to 500% better) than average growth on typical secure savings vehicles. It is not subject to the volatility of the markets and it provides inflation protection. It is “saving”, not “investing”.
  • Policy loans can be interest only loans for the lifetime of the contract (if you choose).
  • With discipline it can become a forced savings model. By having a fixed minimum deposit of premiums (which you decide on), many Canadians can save more over time as they readjust priorities.
  • History – dating back to 1847 in Canada – 20 years before Canada officially became a country – Whole Life Insurance has been a staple of consistent savings. The dividend paying history spans more than 174 years, without ever missing a year, and is unmatched by any financial products in Canada.
  • By design, Par Whole Life insulates owners from the volatility of the markets and the vast uncertainty tied to economic and geopolitical risk.
  • Whole life is a private contract between the owner (who has all the control) and the insurance company. This can create a layer of protection from creditors and judgements.
    Your wealth must reside somewhere. By warehousing your money in an insurance company that you are a part owner of, you are keeping those dollars outside of the fractional reserve banking system. It is the banking system that creates and perpetuates inflation.

We can become a part of the solution to inflation instead of contributing to the problem - every time we deposit and/or borrow from a traditional bank or financial institution. Insurance companies cannot fractionalize or inflate money.

Additional Advantages of Owning Participating Whole Life Insurance on For Your Child

You have the benefit of their entire lifetime of uninterrupted compound growth of both the cash value and the death benefit. The golden goose continues to lay the golden eggs for an entire generation and for every generation thereafter.

It will continue to grow to help supplement their passive income, fund a wedding, help them buy every car (including their first one), help fund vacations, pay for a down payment on a home, and even start a business.

The benefits will be there for their entire lifetime and it will bless the next generation with an enormous tax-free benefit. You are benefiting multiple generations, including yourself.

You lock in the low premium amount for a lifetime. You can stay with the $2500/year amount that most will invest into a RESP (to maximize the government grants). You could deposit $2500/year for 20 years (total of $50,000) which is the same as the maximum lifetime contribution for a RESP. The benefits will far out way those of the RESP. For instance, with a lifetime contribution of $50,000 your child could have $87,000 available at age 25 to pay for their education, $739,000 at age 65 to supplement their retirement, AND $2.28 Million to pass tax-free to their children at the age of 85. (This is based on an illustration for a newborn girl at the time of writing this).

It has none of the restrictions and limitations of the government-controlled terms and conditions put on registered plans.

I can personally tell you of the many kids I know who have encountered health or lifestyle risks that have left them uninsurable. By establishing this early you are providing your child with protection that they cannot get for themselves, and you can create additional options for future guaranteed insurability (I highly recommend that option).

It can become the tool you use to help your children see the power of lifelong compounding and teach them long-term financial stewardship.

Disadvantages of Owning Participating Whole Life Insurance

  • Initial premium costs are typically higher than Term Insurance. This is the cost of ownership versus renting. On the other hand, over the long-term Whole Life can be less expensive than term – and it never expires. This is especially true with a child’s plan.
  • Withdrawals of cash values reduce the long-term growth and cannot be repaid to the policy.
  • Policy loan interest rates may be higher than loan interest rates elsewhere (currently the Equitable policy loan rate is 6.5% and the Canadian prime interest rate just increased to 6.95%). Of note, any interest that is paid to the insurance company contributes to the profits, which you as an owner will benefit from – in the form of dividends. If you borrow from a financial institution, only the shareholders of the bank benefit. The fractional reserve banking system creates money out of nothing and contributes to inflation – that is a topic for another article.
  • As with any loan, interest, if not paid, will compound, and be added to the balance of the loan. However, the simple interest is calculated on the daily balance and charged annually on the policy anniversary. It is not compounded monthly or semi-annually, like most loans and mortgages. Therefore, the actual rate is lower than a traditional loan with the same interest rate.
  • It is a long-term strategy that requires discipline and making educated decisions. A knowledgeable and experienced coach is essential.

How about AND instead of OR?

Strategies

Use Government Money via Student Loans.
If your child decides to attend a post-secondary institution, maximize the use of student loans. The advantage of a student loan is that payment does not have to begin until 6 months after graduation, with no interest accumulation over that time. When the time comes, pay the student loan(s) by leveraging the cash value in your whole life policy. No interest will be paid to the government or financial institution – essentially you have the use of free money for 4 ½ years (or more). Then the university grad can make the very same payments that they would otherwise have to make towards the student loans, to their very own policy.

All that money can be re-used by them in the future! Ultimately, the goal of paying for a post-secondary education is met. All without third party debt and associated interest and they have an ever-increasing asset that they can use for the rest of their lives. AND they will have an enormous tax-free nest egg to pass on to their own children.

Maximize ALL of your options.
Better yet, start a policy on your child, and then take out policy loans to contribute to the RESP – contributing $2500/yr to take advantage of the 20% grants. Your policy loans cost a simple interest, but you are getting an instant 20% government grant. Then you pay the policy loans all back when the kids go to school, potentially using the RESP money (depending on the government rules). Now the policy is totally intact for your kids to use for their education funding and beyond. If possible (assuming qualification), you can also use the student loan strategy described above and you can take advantage of ALL the options, maximizing the benefits of each and minimizing the downsides. This becomes an AND situation, using an AND asset – Par Whole Life Insurance.

Summary

Overall, Participating Whole Life Insurance is an asset purchase that builds equity and provides a guaranteed death benefit. This asset allows the owner to benefit while alive and you do NOT have to die to win. It is true LIFE insurance and not death insurance. Due to the level fixed premium, guaranteed for the lifetime of the Whole Life Insurance contract, Whole Life Insurance becomes a financial tool that can be used wisely to build wealth, provide needed liquidity, and legally avoid certain income and estate taxes. Whole Life Insurance continues to remain a solid and secure financial tool that is used by individuals, families, business owners and companies to keep more of the money they make. Your wealth must reside somewhere – why not in an entity that you own and control and that grows your wealth while you are able to access it and use it?

We all would do well to discover these truths before we lose the opportunity to purchase the life insurance that will provide us with the guarantee that we will have enough money when we retire; instead of risking money in investments that get destroyed by taxes, management expense ratios, and volatility – all out of our control!

Disclaimer

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Commissions, trailing commissions, management fees and expenses all may be associated with purchases. Please read the prospectus before investing. Investments are not guaranteed, their values change frequently, and past performance may not be repeated.

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