With summer winding down and the focus shifting back to school, here are some tips to ensure you are getting the most out of your Registered Education Savings Plan (RESP) withdrawals, and more importantly, how teaching your kids financial literacy plays an important part in helping them succeed financially.
Kids can go through the education system, right through post-secondary school without a basic financial education or financial literacy. It’s unfortunate, but it is generally not a part of the curriculum to learn even basic concepts about saving, the compound effect and how it will be helpful in their future.
With this gap in knowledge, it puts more pressure on parents to teach their kids financial literacy, so they are set up for success and to instinctively make smarter financial choices – like setting aside a portion of a paycheck for savings and holding off on instant gratification for substantially larger rewards in the future.
Besides addressing how to efficiently manage your RESP withdrawals, I will first discuss how you can have the “money talk” with kids and young adults, and how teaching the right financial habits early on in life can have a direct impact on their future.
How to teach your kids financial literacy and good money habits
As a parent, you want the best for your children. This doesn’t necessarily mean you want them to have the best clothes, the latest toys, or the coolest gadgets. Most likely, it means you want them to be happy, safe, and secure. You want to lay a foundation that they can build upon to do well in life. The question, then, is whether you’re teaching your children the necessary skills needed to pick up good habits from a young age.
Without a working knowledge of money, it is very difficult to do well in life. Money is central to transacting life, day-in and day-out. Where we live, what we eat, the car we drive, health care, education, vacations, entertainment, insurance – money impacts everything we do.
Yet, plenty of parents aren’t helping their kids become financially literate. Not only are most parents missing out on opportunities to talk to their kids about money and finances, but a large percentage are even hesitant to discuss financial topics with their kids for one reason or another! Kids, however, are always curious and looking for their parents to share their wisdom – just think about how often you are asked the simple question “why?” on a regular basis!
Here’s a general overview of how you can teach your kids financial literacy from an early age, and I will include resources for more information as well:
Start with the basics at a young age: the earlier you start a child’s financial education process, the better because research shows that money habits and attitudes are already formed by then. Once your kids are old enough to know they shouldn’t be eating coins, that could be a sign they are ready to start learning!
Instill a habit of saving: It’s important to teach them from a young age that money isn’t just for spending—they should be saving money regularly, too, which will teach discipline and goal-planning for the future. A simple way to start is by giving your child a piggy bank or savings jar where they can store their money.
Create opportunities to earn money: Kids need to have money of their own so they can learn how to make decisions about using it. Allow them to earn an allowance!
Model good financial behavior: Just as important as the lessons you teach your kids about money are the ways you discuss and handle money when you’re around them, so you’re not sending mixed messages. If you want your children to develop good spending and saving habits, they need to see you making smart spending and saving choices.
Financial talk at the dinner table: A great way to normalize financial talk is at the dinner table. I find most people shy away from discussing their financial situations with family. While there is no need to divulge personal information, young children can learn a lot when talking about their dreams and wishes for their future. You can discuss the importance of making an effort in school or a hobby, and how that effort translates into opening doors and opportunities in the future. Essentially, you’re helping young children learn about the value of planning and hard work, setting the stage for their future.
Remember, financial education starts with a conversation!
Educating your children about personal finance is a process that can take time. But if you put in the effort and continuously communicate a clear message about money, you will instill good habits that will serve your children well.
For a deeper dive on how to teach your kids financial literacy I encourage you to check out:
Back to school registered educations savings plan withdrawals
Before I go into the withdrawal portion of the RESP, here is a quick summary of the account benefits:
- The lifetime contribution limit is $50,000 per beneficiary
- The Canada Education Savings Grant (CESG) matches contributions by 20% up to $2,500 per year per child, for a total grant of $500 per year.
- The CESG can be carried forward to future years, with a maximum CESG payable in any year is $1,000 per beneficiary.
- RESP savings grow tax-free in the plan.
- The student and not the parent is taxed at their income level when they receive their education assistance payments, which consist of the grants and income.
- All original contributions made to the plan over the years can be withdrawn tax-free by the subscriber.
When withdrawing funds from an RESP, the most common question I get is whether it makes more sense to first take out the government grants/income or your original contributions. Once you understand that the grants & income portion of the account are only available once the child is in school, it really should be a no-brainer!
First, withdraw the grant and income portion until depleted, because if your child doesn’t finish a post-secondary education or completes the degree with money still available you may lose the funds, whereas your contributions are available anytime.
Before withdrawing funds from an RESP, ensure you are reading this article to do it properly: