Mike Holman from MoneySmartsBlog.Com is one of the most respected financial bloggers in the industry and when it comes to RESP’s, Mike literally wrote the book on the subject.
The RESP Book takes a comprehensive look at how RESP accounts work, including how to get one started, what kind of investments to buy, and how to withdraw the money when (or if) your child goes on to post secondary school. I enjoyed Mike’s straight-talk approach to the often complex topic of RESP’s. The chapters were easily digestible and each contained a helpful summary to capture and restate the key points.
A few weeks ago I had the opportunity to interview Mike Holman about The RESP Book and about RESP’s in general:
Why did you decide to write The RESP Book?
I had already written quite a bit of RESP material on my blog, and my former blog partner (Mr. Cheap) actually encouraged me to write a book. After learning enough about how simple and inexpensive the actual self publishing process was, I got the idea that this might be a practical thing to do. I wouldn’t have to sell that many copies to make a success out of it.
Also, there were no other RESP books or resources on the market in Canada, which helped get some publicity when the book launched. The reaction wasn’t just, “oh, here’s another RESP book”, it was the only RESP book.
The rules around RESP contributions and withdrawals are complex. What’s the one thing parents need to understand about RESP’s?
If I had to name just one thing I’d say to make sure you understand the rules, especially on the withdrawal phase. There are areas you can get caught-up where you might end up paying more taxes or have to give grants back, or not maximizing the amount of money you get out of your account if you make a mistake. The RESP is not rocket science but it’s definitely a level above the RRSP and TFSA in terms of complexity.
It even seems like the banks and their representatives are often confused when it comes to RESP rules. What do you make of that?
I get emails quite frequently regarding RESP’s and some of them involve conflicts with employees at financial institutions who basically don’t know the rules. It’s pretty common. But financial institutions might have people who are fairly new and they don’t just need to understand RESP accounts they need to know all types of accounts as well.
There’s definitely more contributing than withdrawing going on, so maybe some employees haven’t had to deal with the withdrawal phase as much, although RESP’s in their current form have been around since 1998 and employees of financial institutions are under obligations to know the rules, and they should.
In the book you recommend using TD E-Series Funds. Why is that?
For somebody who wants to take a do-it-yourself approach, I think the TD E-Series funds are the easiest and cheapest way to do passive investing within your RESP account. That applies to non-RESP accounts as well.
Should parents set that up right away, or wait until they’ve contributed a certain amount?
From a hassle point of view you might want to wait until you have at least $1,000 to make it worthwhile to set up the account and make the appropriate asset allocations. But if you’re going to buy index funds, typically people will set up a monthly contribution so even if you don’t put much money in the beginning you can set up a monthly contribution for $50 or so and then go from there.
Most young families can’t afford to max out their RESP contributions to take advantage of the extra grants (CESG). What approach should they take with their contributions?
In my opinion, before you make RESP contributions your finances should be in decent shape. Which is not to say they have to be perfect but if you really don’t have much money, or you have credit card debt I think you should address those issues first. If you’re spending more than you make, RESP contributions should not be a top priority.
But if you are in a position where you want to get going, I think even starting with a small amount like $50 a month will help quite a bit. Every little bit counts. You might get to a point later on where you’re not a young family anymore and maybe your mortgage is paid off and at that point you can increase your contributions a lot.
Is there time to catch up?
You can catch up basically one year of contributions each year. For example if you haven’t contributed for the first five years, the following five years you can double your maximum contributions (assuming you have the money), so you could put in $5,000 and get $1,000 worth of grants and use up your unused contribution room. What you can’t do is contribute $20,000 in one year to try and get the grants from the previous 5 years. Once your child reaches the age of 10 then you start to run out of time if you want to catch up and max out the grants.
You recently released an e-book about how to withdraw money from your RESP account. Why did you focus on the withdrawal phase?
One theory I have is that people in the withdrawal phase might be less inclined to buy an entire book because they know they won’t have a use for most of it. But considering the book only cost $20, including delivery charges, it probably shouldn’t matter, but still I understand that concern. I just wanted to see if doing a smaller, more specific book would appeal to people in that phase of the RESP account.
I’d like to thank Mike for taking the time to chat with me about The RESP Book. This book is an excellent resource for Canadians, and if you have an RESP or are thinking about starting one, you need to have this guide on your bookshelf to help you through each phase of the account.
- The RESP Book
- How to withdraw money from your RESP account whether your child goes to school or not (e-book)