Kid cash

Yesterday, cars. Today, kids. Every day, dogs. What a blog.

Oh yeah, and the MSUs that bind it all together.

“I’m a long time daily reader of your Greater Fool site,” writes Mike. “I’ve always appreciated the candid advice, humour, and, most of all, the dog photos. Thanks very much for sharing your insights for so long.”

Nice. So, wassup Mike?

“I have a question about RESPs that I think might interest some of your readers. I have a family RESP setup for my two kids that we’ve contributed to for several years. Through regular contributions and low-cost indexed ETFs, we’ve grown this account into the $175k range. I ran an allocation of 80% equities – 20% fixed income until about a year ago, which resulted in some good gains, then derisked it somewhat by moving to 60-40 per our original plan.”

“At this point, I’m considering drawing back on the risk even further, as the time horizon on them graduating high school comes closer (3 and 5 years away). I was wondering about your thoughts on the right approach to this scenario would be. I recognize the potential for lost gains, but also worry about having to take money out in a market drop. Thanks very much for any thoughts!”

Just to refresh everyone’s memory, the RESP (registered education savings plan) is the only tax shelter in the country which guarantees a 20% annual return on contributions. Moreover, money invested inside this account grows completely free of tax. Even sweeter, distributions are usually untaxed (as they’re in the hands of kiddos) and unused funds may be moved inside an RRSP.

Have a kid? Then consider an RESP. Ditto for a grandparent, a relative or even a friend – they can all be a subscriber (the person opening and contributing) for one of these. There’s a lifetime limit of $50,000 for contributions, but growth is unlimited – and the plan can stay in place until the child hits age 35 (‘Time to leave the basement, son…’).

Then there are the freebies. The Canada Education Savings Grant will hand over $500 for a contribution of $2,500 – every year, per child up to $7,200 each. Lower-income families can also get a Canada Learning Bond (up to $2,000). And some provinces also throw in cash.

As Mike shows us, all this money can be chunked into investment assets, just like any other portfolio – but low-cost, highly-liquid and diversified ETFs are probably the best choice. The contributions, grant moolah and accumulated gains all percolate tax-free inside the RESP until Junior decides to access funds for education.

Withdrawals are a little complicated. Post-Secondary Education (PSE) payments return the original contributions tax-free (to the parent or the kid), while Educational Assistance Payments (EAPs) – the taxable government grants and investment earnings inside the plan – are paid to the student beneficiary. In the first 13 weeks after enrollment a total of $8,000 in EAP money can be taken by a full-time student, and after that time there’s no limit. Even for a Porsche 911 Carrera.

If the child eschews schooling and becomes rock legend instead, the RESP bucks can be transferred to another child (get a family plan). Investment earnings left in the tax shelter after schooling is over can be paid to the parent (or other subscriber) but are taxable, plus a 20% penalty. That might be avoided by transferring the funds into the parent’s RRSP (or a child’s registered disability fund). The unused government grants need to be repaid. All original contributions can come out tax-free. So, ensure you understand the rules and keep records.

So what should Mike do?

Nothing.

Once he rebalances from 80% growth-oriented equity ETFs to a saner 60/40 balanced portfolio, he should let it roll. There’s still three to five years before any funds will be needed, and then four or five years of schooling to be financed. That’s the better part of a decade, and there’s never been such a period in post-WW2 history where markets and portfolios have finished lower than where they stood ten years earlier. No, it’s not different this time.

Moving the money into low-yield, interest-bearing junk would be an emotional move. Not a rational one. It is this logic that often moves parents to open GICs for newborns’ RESPs because they feel so overly protective. They want surety. Zero risk.

If that was the goal, there’d be no children.

About the picture: “Hi Garth.  Your post the other day about some dirtbags fist finding your chest reminded me of this: sitting in my parked truck in a small town parking lot,” writes Erin. “Window down, summer.  Mary was curled up in the passenger seat and not visible.  Another dirtbag walked up to the hood of my truck and slammed his fist and yelled to give him some money, he called me the B-word!  I was startled.  Mary, who was sweet as the summer is hot found her call to action.  She leapt up, slammed both paws on the dashboard and let him have both barrels.  Spit, teeth, barks and growls all at a speed that was baffling.  She decided that wasn’t enough force and made an attempt at leaping out my window which I managed to block.  The dirtbag quickly left.  I reflect often on how that scenario could have gone if Mary hadn’t been there.  Here’s a pic of her telling me to let her out of the truck, she wants to go to do something cool and fun.”

To be in touch or send a picture of your beast, email ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/12/12/kid-cash-2/