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225. RESPs Explained | Reasons Why You Should Not Use An RESP · Wealth On Main Street

• 0:00
  Speaker A: You were listening to the wealth without Bay street podcast, a canadian guide to building dependable wealth. Join your host, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on. So you want to save for your kids education. You've heard about these different savings programs that are available, and you want to go ahead and implement the government sponsored plan to help save for college? Well, we're here to tell you that that might not be the best option. Instead, we want you to start thinking about a lifetime value of what that savings could create for your family, including your child. I'm joined with my good friend Henry Wong here today. We're going to talk a little bit about Canada's Resp program, which is the registered education savings plan. And what are some of the unknown things that people should be aware of? Because we always want to inspect what are the things that we don't know so we can get clear on them. And then we're going to look at a little bit of a comparison, not that we want to compare against it, but we want to look at the difference of what if we were to use a different type of mechanism, a different type of vehicle to do the same objective of saving for a child's education, but that allowed for continuity on an ongoing basis throughout life. That's going to be our focus today. So, Henry, where do we want to begin with this incredible topic?
• 1:23
  Speaker B: Yeah, thanks for having me here, Richard. And just to kind of start the conversation, one of the main things that really I wanted to share with the listeners as it relates to the situation on building the fund or money towards maybe the primary usage is for education. And I just want to maybe digress a little bit back on my experience. I taught at a post secondary institution in Canada, in Toronto specifically for over ten years. And in that time, including myself going through it, I didn't grow, come from a well off family where I actually had to work to build my money to pay for tuition. And I found myself in a very interesting situation when I was doing it myself personally, which was my family was a low income household. We didn't have enough saved or built up in what most people actually saw had an resp for their post secondary education. And when they were building it for that post secondary education, the amount that would get built wasn't generally enough, especially with the kind of program that we were enrolled in. It was kind of, it was in what's called a flat unregulated fee. So the tuition fee was quite high, and if you add it, include books and everything along those lines, the amount that was saved up was generally not enough for affording the tuition and the other ancillary things for that education. Now the difference though was when the amount that I was using, I didn't have savings. But what happened that opened up was the loans that I can get from school or from the government was a lot higher than what my counter occult parties or students were at the same time who had an RESP built. Because one of the things that people may not realize is the resp balance that is being built is factored into the loan qualification on what the student can get for their tuition. So in my standpoint, actually, in terms of the amount of tuition and salaries that I had to pay, majority if not all of it, was funded by the government loan. And for those of you who didn't know, I'm in Ontario and the loan I could borrow money until about the 6th month post graduation is when I actually would start paying for it. So I had basically no cash outflows for four years, four and a half years while I was going through this education process. Now to the comparison, other students who had resp, they would be able to get a certain amount and then that's the amount that was saved by the parents or the sponsors of the RESP. But the shortfall for the tuition, they needed to get a loan, but the loan often for the loan criteria, qualification requirements never met enough to get to the rest of the tuition. So those students were actually stuck in a situation where they couldn't afford it. So everyone found different solutions to financing the shortfall on that tuition amount. But if we kind of compare the difference, I had it fully funded by a loan. We're not talking about whether loan or is good or not, we're just talking about the affordability and the tuition amount. Whereas those students, for better or for worse, did a really good job preparing for it, but they kind of got bit in the end for it. And this was not just a situation over 20 years ago when I went into post secondary education, but it was also during the duration while I was teaching and as an instructor. And I could see the same experience as students see that I was young and they would open up to a lot more things and, you know, they share about their journey financially as a student. And it was very strange, the struggles.
• 5:07
  Speaker A: And things that they were dealing with to make ends meet.
• 5:11
  Speaker B: Yeah, it was still the exact same thing to when I did it. 20 years ago. And for them, actually, the tuition was a lot higher than what I was paying, by the way. Mine was still not low by any means.
• 5:24
  Speaker A: What's interesting about this, and what comes to mind is hindsight versus foresight. And as parents, we 100% want to do the best that we can with the tools that we have available and the knowledge that we have to set up our children for success. That's around how we raise them, the types of things we want them to know and understand and learn, and then around financial aspects as well. So not just the having access to capital, like, say, for post secondary education, but even just the model of understanding and knowledge around money. And I think everyone wants their kids to be at least as, if not more successful with money and money decisions than we ourselves are. As a parent, that's how I would feel. And when we think about setting up something, you know, as soon as you have a newborn and you leave the hospital, at least it was when I left with my kids. And I've heard from multiple parents, they send you with a package when you leave the hospital. And in that package is a form asking you or telling you that you should sign up for an resp account. And often there's a. There's an organization that's promoted sometimes in there, which, for better or for worse, most of the people I have met with and who have experienced setting up their resp with that organization have had a miserable time dealing with it, and also a miserable time getting their money out of that situation. So, all that being said, we're being promoted to immediately, at birth, right at the hospital level, to go and get this education plan savings, and it is important to start saving early. Of course, however, we have the foresight that we're going to do this wonderful and great thing, but then we end up having the hindsight. Was that actually the right thing? Did it create the outcome we were looking for? What ends up really what you're saying, Henry, is that there was an unknown lack of choice and options that were created for you and for the students that you saw repetitiously over the timeframe that you were in university and teaching there, where this is not an isolated problem, this is actually a systematic problem. And so if we know we have a problem, then we can tackle and deal with it, and we can exercise foresight. If we don't know the problem, we are left in hindsight. We're always looking in the rearview mirror, and we're not able to deal with the things because it's already happened. So part of our recording today, our discussion is to help people really identify and get clear so that you can be thinking with forward momentum and that foresight level view as to how you want to approach the educational mindset for your own children or your grandchildren, depending on where you're at, at the stage in life.
• 7:57
  Speaker B: Yeah, absolutely. Because one of the main things when you're in that type of moment, however, things are how you're kind of going through overwhelmed, good or bad, you only see one side of the coin and the other part is most people without that additional thought since that has already been placed in front of your mind and you've already been presented with the benefits from that side, but you never really had enough education or clarity to ask any other questions down the road. And I think it's really important to kind of close that gap as since most people, if they go through education, they only run encounter these challenges at that moment. And we're trying to, for lack of a better word, put that upfront for you so that you have, I'll call a fuller picture on the consideration on how your approach is to, in my opinion, building a bigger and better future for your child. And it doesn't need to be restricted to what most people have presented to you with a government specific plan that is set to the government specific rules that is residing at the books of someone else's bank.
• 9:15
  Speaker A: This September 12 is don't spread the wealth day. Get a copy of our new book, don't spread the wealth how to leverage the family banking system to own all the gold, make all the rules, and enjoy generational riches. This book is jam packed full of incredible bonuses that we've put together, including our 15 page guide to hosting your own family banking meetings. Pre order your copy today using the link down in the description or visit don'tspreadwealth dot don'tspread wealth.com learn how to keep the money in the family so you can prosper together for generations to come. And those rules are what we're going to dig into and we're not going to go over them to an exhaustive level, but we're definitely going to identify some of the key components. And so I just want to recap, really importantly, Henry went to the experience, funded things himself. He funded it through his own efforts, which really happened primarily after the fact. He was able to focus on his studies, not knowing, not needing to make payments on those government loans versus like a third party loan where you'd have a minimum payment or whatever required. And after graduation you could, you would begin after six months is when the payments begin on those loans. Okay. Versus someone who had an ResP account couldn't qualify, even though they probably needed an extra loan they had, they weren't able to get what they needed and, or the loan structure might have been different. So all the way around, the result might have been less focus, maybe was available for their studies because their energy had to now go on to how am I going to get my studies paid for and be able to still also be able to do my studies? So just recognizing how that can show up and it's not across the board, but I'm certain that in the students that you met with, Henry and you spoke to, this was the common frustration and occurrence that was that was happening for them.
• 11:07
  Speaker B: Absolutely. And the thing is, they know it's frustrating. They know it's kind of those moments where, you know, it's frustrating, but people just accept it as it is what it is, and they're not aware that there's actually another option. And that's what we're going to talk about.
• 11:25
  Speaker A: So they'd be really happy that their parents helped them out with this experience and then also not happy at the same time not realizing what had transpired and would be unfortunate. But I suspect that that did happen for many people, to a degree, maybe still happens to this day. So with that in mind, let's go through an example now where we walk this through and we talk about some more of the mechanics and we explain some of the divergence between these two thought processes that we're going to show people today.
• 11:51
  Speaker B: Yeah. So one thing we're really going to talk about is the process about just being a lot more, you know, how you may have know it right now, I'll call it the traditional way of focusing specifically on building a fund just for education. And we're going to expand that thinking or the scope of that thinking to just beyond just education. However, what about the other factors of life? Whereas if you kind of limit to what you're already knowing now, there's kind of an end stage to that side of things. But what we want to start opening your mind to seeing is a bigger side of things. And again, just for more consideration as we're going through it. So the first thing is, I just want to dive through the mechanics of traditionally building the funds inside a government program that is designed by the government and it is in partnership with a financial institution to build the pool of funds there.
• 12:52
  Speaker A: Yeah. And while you're bringing this up, Henry, I want to identify, you know, what, what is, what's the carrot that leads people to enter into this arrangement primarily is initially the thought that they want to save for their child's education. And the second thing is that there's a promise of some grant money that's going to be added Canada education savings grant. And so, you know, at a high level, if you put in to a maximum limit of $2,500 per year per, per child, they will give you 20% as a grant for the, for the end of the year, at the end of the account, which works out to $500. Now, they'll continue doing that up to a maximum level, which is $7,600. So once you have contributed annually, 2500, eventually you hit a peak where now you've got all of the grant money that's available and you can't get another dollar of that grant money. So there's some limitations there, which a lot of people aren't aware of. And that's kind of how it works. And so that's like the carrot that really attracts people. This idea is that, oh, it's free money, I'm gonna get free money from the government. Now, you and I both know, Henry, there's no such thing as free when it comes from the hand of the government. But that's just my personal opinion. I'm sure we could back that up with some facts, but that's my opinion. So someone is paying the price and probability, it's you. And so you actually identified for me something before we hit the record button about a major red flag that I wasn't unaware of. I learned something new today, and I love learning new things. And this major red flag is something that to me is really critical in our understanding of how this tool may not play a pivotal role in your life once you're aware of it. But again, awareness is what helps us be able to make better decisions as we move through our time.
• 14:28
  Speaker B: So I'm just going to share my screen, and it's first important to recognize the construct of the program and talk about the flow of the stages of the program. So we're using resp as the capital aspect. So there's that accumulation stage where money's going to go in, then there's the kind of called the storage or the warehouse, and that's where the value can go up and up and down depending on what you put it into. There's that withdrawal stage. You can withdraw earlier, or you can withdraw during the time when it's eligibility for usage. And then there's an end stage to it. Like this doesn't run all the way until lifetime. It doesn't follow the child all the way until 70, 80. Because the specific purpose of this program was for education and education only. So the first thing I want to just highlight is this was a very defined program that was set up by the government. So now the next is capital. So money is going to go in. So you've already talked about this, Richard. So money goes in. And if you fund it properly, according to them, then you're going to get one. You can access one of the main federal grants. And that grant is if you fund it up to 2500, you'll get an extra 500. And everybody's like, as long as I fund that, I've guaranteed. If you look at things from, quote unquote, a finance lens where people try to look at ROI and they're like, oh, I put 2500 in and this is a guaranteed $500. So that's 20% return. That's free money. One thing I just want to take a step back and really recognize is whether you agree with this or not, the government has created something that has influenced your choice. And I'm not some, I don't like to have my choices influenced. I like to make my free choices. And that to me is just something I wanted to put as a pin mark for people to recognize. And that's what incentivizes behavior, for people to drive into something like this. And then that, in a way, if you are just so focused on that, you kind of neglect looking at other options. So that's the money going in, and it's being incentivized by the government by providing you a $500 grant. Now, this grant is really important because it's actually not yours until it meets the eligibility requirements, for example, going to an approved institution. So you actually, you may see the money go in, but it's not actually your money until you've earned it. And the only way it can get earned is when the child achieves the specific requirement.
• 17:13
  Speaker A: Yeah. So what you don't recognize is what you're giving up. And what you're giving up is control over your choices. And now, granted, there's a lot of institutions that are available and actually more were added at one point. It used to be that, like a lot of trades, things weren't really covered very well, but that's more factored in now. But one of the other keys I want to identify here about incentive, Henry, is it's not just the incentive of starting the plan, because you might get this grant. But it's also an incentive to limit how much you put in, because if you get the maximum for putting in 2500, that means every dollar greater than 2500, you would diminish the effect essentially of that quote, unquote, free money or return. So, so the incentive works on both ways for you to start the program and to cap the amount that you put in the program, which happens quite frequently for people. So neither one of those is ideally good. And, and so again, how we incentivize behavior often is what dictates how we go about doing something. So just be mindful of that.
• 18:15
  Speaker B: Yeah. And the overall cap, actually, in terms of the program, the government only allows you to put in 50 grand as.
• 18:22
  Speaker A: A max over the lifespan of the.
• 18:24
  Speaker B: Program, on the lifespan of the goal. So that's also important to recognize. Then there's the tax environment. So you're actually deferring taxes and you're actually transferring or distributing the taxes. And ideally, if the child does use it, the government's next incentive is to defer the taxes to be taxed in the hands of the child, which in theory should be. They're not working and therefore they're not going to get taxed. This is the part that I kind of want to tie back to our opening segment when we talked about, is that really true? Now the next thing is, so money is going in and it is getting housed in a location. And that location is what is being a portfolio. Again, depending on what you use, if you use a sponsorship program, if you use a self trading account, whatever you use, they have now been a lot more creative of expanding options and what you're going to do with it. Not going to critique the merits on what's better from there, but just the general process. That money is going into a storage location where you'll get market gains, market losses, interest income and any forms of that. Now, this is also growing for you in a sense of what's called tax free. And we've already kind of talked about this as it relates to rrsps. You're surrendering tax advantages. I'm not going to beat the bush around that, but if you had the same gains outside of this program, you actually get favorable tax advantages, like for capital gain, which is 50%, whereas if you're putting it in here, you're actually surrendering those tax advantages because it's inside.
• 20:02
  Speaker A: This program and it will be taxed, in theory, in the hands of the end user being the child, which may or may not be the case if they qualify for an approved program which we're going to get to in a second.
• 20:15
  Speaker B: The key is the qualification. Now we're going to talk about that withdrawal stage. So the withdrawal stage comes from well, if it meets the approved usage. So there's three options. You can withdraw it at any point in time. Of course you're going to face potentially penalties which is not really actually disclosed to you upfront. Then there's the approved usage of it which is where it meets qualification. And then there's the last one where it doesn't meet qualification and there's no usage of it. So there's kind of three routes on that end stage which most people are actually not talked about right at the beginning before they enter into it. The focus is do this right now, be responsible and get this. And you're going to get incentivized by the government grant. But they don't talk about the end stage component of it. So this is where there's a withdrawal stage. And if you withdraw the gains in the portfolio, so let's just say you've accumulated and it's become 50,000 and the amount has become 60,000. The extra amount, 50,000 to 60,000 is a gain. There's a tax on that if you are withdrawing it before the eligibility period and there's also a penalty involved and we'll talk about that in a lot more detail. And then there's that approved usage the child uses, it goes to grant, gets taxed at their tax level, so on and so forth. And then there's the no utilization. And that also goes back into the framework of getting this potential penalty that we'll talk about. And then the last option is to avoid the penalty. A lot of people end up doing what's called rolling it into an RRSP as another potential option. Again, more to, to be discussed as we go through the rest of this conversation.
• 21:57
  Speaker A: Now, a lot of our conversation is going to focus, Henry, on the actual paying for education component. But I want to touch a little bit on the utilization piece because you mentioned that's one of the things, no utilization in compare and contrast. If we just think for a moment what is one of the biggest expenses of the average north american family? Well, we know it's interest and we know it's taxes on a lot of things, but it's actually rearing a child, you know, having a child, raising a child, feeding a child, like all of the necessities and the needs, putting your child through hockey and soccer and lacrosse and volleyball and tournaments and vacations. And you know, if, you know, eventually, if you have, if you have kids and they're teenagers, well you know, they eat a lot of food and they have a lot of high end needs. Eventually they need a car. Like all of these associated things. And when we add all up, that is a massive amount of capital over a period of time per child. It gets added up. That's where a lot of parents money goes. The money flows towards things that we need to do for our kids and to make them survive and thrive. And so the lack of utilization, if you're spending all of your money just to make your kids survive and thrive, plus you're also putting money over here for the future so that they can continue to survive and thrive. But it's separated and it's now locked away in a box that there's penalties and issues that would get in the way. If you had to withdraw that capital then you're de incentivized from being able to utilize it, which means all of your other earned income has to go towards that utilization of life. Vacations, hey, if you wanted to buy a condo, let's say in your university that you could rent out as an asset for your kids. Those are things that people will talk about doing. You know, all the sporting events, major milestones that you do. There's not an opportunity to utilize any as capital in the method that we teach people about becoming your own banker. And if we implement that method which we're going to talk about in a moment, you don't give up that utilization aspect and you don't give up the ability to use it as a training mechanism, a training tool. Start teach monetary value and monetary implementation in the family line. Whereas if you park it and set it away into this locked away machine with the government rules and the incentives and the de incentivization of taking money out, you're literally giving up a lot of opportunity that could show up for you and the family by having access to that capital. And I can't understand enough how impactful that can be over a lifespan. So don't underestimate the value of utilization. It is probably one of the largest valuable components that we have with all of the money that we work with on a daily basis cases.
• 24:35
  Speaker B: And we're going to dig into that today. Because when you're rearing a child and essentially funding the survival and the nurturing of the child and to then eventually let's say utilize some of the funds for education to invest in their development for career and future, that is a lot of money that you are bringing in, and then it's also leaving you. And that's probably why the reasons behind the resp was built and restricting you with all these rules, so that you don't interrupt the compounding of the capital that's sitting in that particular location. We're just trying to tell you that when you practice the process of banking and implement the infinite banking concept, you're still able to enjoy the fact of having uninterrupted compounding of the capital while as you touched upon, Richard, utilizing the funds for raising the child, using it for education. And the best part is you actually get to decide the amount of what you want to put towards this fund, instead of the government telling you that you're capped on a lifetime of 50,000 and we're going to incentivize you for the extra only 7200 amount. So this is kind of where we're starting to open up your wanting to open up your eyes to realize this other option. There's a lot more flexibility in terms of how you get to control your money. So the next part I just want to dive into is still a little bit more detail on the traditional approach. Now, this is money that they've given you a container to flow into, and you're flowing in that money into that container. That container has rules. Now we've got to really take an honest assessment of that container, whether or not it meets the needs of what you need. Now, post secondary school is expensive. It's 50,000 per child. And what I've done is I've actually gathered information from the government's website and other government specific sources and they've already shared with you college and vocational school. So this is if it's, again, one of the approved ones in Canada is about 7000 to 22,000 per year. And usually the duration that people go through is about four years. So four times 22,000 is $88,000. Now, if we just look at the cap that they've put in, that's not enough. So where is the rest of the 38,000 going to come from?
• 27:13
  Speaker A: What you told us earlier, it's not going to come from a government student loan.
• 27:17
  Speaker B: They weren't. Yeah, exactly. So not only were they going to fund the shortfall for the student loan part, but there may not even be from your resp, you may not even have built enough from the resp in that standpoint. And that's still going to impact the quantity of funding that you're going to get from the government from there now, if you go to university student, as a university, university student, again, roughly international, but let's just say the domestic is still around the same 22,000 and we can range it to the 36,000 also. So if you're going to a university, there's an even higher capital commitment. And if we look at the individualized resp program, the max is 50,000. So are you going to in the lifetime of when you started until when the child is actually going to use it, build the shortfall from capital gains or market gains? Most of the time it's unlikely, because the sentiment from most parents when they're putting money into this container is they want principal protection. And if they want principal protection where the value could never go down, they're trading off for the value of the capital is likely not going to be significant. They can't expose it to risk. And in that circumstance, that minimizes the ability to actually have much capital gain or growth in the first place. And if you kind of choose these kind of programs, again, depending on what you choose, they charge very, very high fees, and I won't dive into those fees. So if you kind of take a step back and think about it, the amount of fee, sorry, the amount of money that's sitting in the container, you're not really going to get a lot of gains from the market. And the fees on these type of containers to manage this container is quite high. You're essentially paying someone to hold on to or look at the container for you while they're enjoying those fees. I'm sure they do a lot of work on those fees for getting those fees. But if we're looking at the end user, the real important question is, did your capital actually raise in that period of time, and was it enough for educational purposes? The first thing is to also recognize, in order to be eligible, the contributions can't be withdrawn at any time, however, because if you draw it too early, that's going to impact the government grants, the qualification criteria. And the second is it forces the child to go to an approved post secondary to get the grant. And generally it must be in Canada. What if your child wanted to go somewhere else or post secondary school? That's not going to be an option for them. What if your child doesn't go that direction and doesn't want something different? This is a very key thing.
• 30:03
  Speaker A: What if they want to start a business instead?
• 30:05
  Speaker B: Exactly. They've already been pigeonholed to, you must go to the school, otherwise you're foregoing my grant that I built up over that time and those other things that happen. So this is kind of what's really important is that it's already, it's already predestined what the child needs, needs to do to financially handcuff them. And that's not kind of the parenting style I like to have for my children. But some, some people have, are able to make their own choices, which is good.
• 30:39
  Speaker A: Well, and doing a quick future value calculation. Henry, a person would need to get consistently, without fail, about seven and a quarter percent on their $2,500 a year, plus their government grant accumulation, just to factor in that minimum amount of payment that you estimated based on, you know, what it needs to get through a four year degree based on that government site. And that assumes no losses, constant compounding. And that would be an after tax level, because you need the net version of that, essentially, for the, for the student to be able to use that capital to go to work towards the education and environment. And on top of that, you'd also have to be in a position where you'd also be able to match with inflation because those university cost numbers are today's numbers. So if we add 15 some odd years on there, that's not going to be tomorrow's numbers. So if we want to add that in, well, then the impact obviously would be much greater. So even, even earning seven and a quarter percent consistently without fail, with no, no loss. And most people I meet and I work with, been working with client families for 15 years. One thing they don't want to do is they don't want to gamble with their kids education fund. So the result is they usually have it in very conservative types of investment structures because that's so important to them. They don't want to gamble with that education fund, which means they're not really achieving, most likely in many terms, what they're actually setting out to do in a very effective model.
• 32:12
  Speaker B: Yeah. And now what we just want to illuminate in terms of the conversation on the resp that you may not have been aware of when you were first entering into it is, well, what happens at the stage when the eligibility is actually not met. So the child has decided to do something different or they are. Yeah, basically something different or hasn't met. Here are some of the things that I just kind of wanted to highlight at a very high level. Now, one thing is that you can withdraw your contributions, but when you're withdrawing the contributions, you're surrendering those grants. So that 500 that you were putting in or that max, that's going to be surrender. The next thing is, let's just say that choice is being made and you are withdrawing that money. And if there's gains. So I'm going to keep the numbers simple. Just for conversational purposes, the gains in the portfolio went up. The portfolio or the value in there is 30,000, the portfolio went up 20,000. You know, just realistically speaking, the nature of products that's being the capital is being applied to. The likelihood of that happening is very low.
• 33:34
  Speaker A: Kind of like a snowball in hell sort of a situation, I would think.
• 33:38
  Speaker B: No, it just doesn't work. It's not going to be an extra 20,000, but I'm using 20,000 for a very particular reason, just to keep the conversation simple. Now, on that 20,000, that's going to get included for the gain. So that first the grants are gone and now the 20, like the 20,000 gains are going to get included to the person's income. For setting up this program, the parent.
• 34:08
  Speaker A: Essentially, whoever the tax paying parent is, is going to have to take that on as added income that tax year.
• 34:14
  Speaker B: So let's just say that's 20,000, the person earns 100,000. So that's 20,000 getting added to their marginal income, which we'll talk about that impact. The next thing is that 20,000, there's a 20% penalty that is levied on that gain unless it's transferred to an RRSP. So you get the option to transfer to an RRSP. Now, we're not going to talk about whether RRSP is good or not, but what if you have already maxed out your RRSP contribution room? So this is going to use up your RRSP contribution room, too. So these are, again, just making sure that you recognize there's other components involved that likely hasn't been fully discussed with you when you've been setting this up. And this is where not only is it impacting your RRSP program that you may have been using, but it does incentivize you to not penalize you for taking it out. Today, they've created a road or a bridge to roll that money into another pre existing government program. And this is not a good or a bad thing. It's just recognizing the fact is there's another bridge that's created for you to push the problem to the RRSP standpoint.
• 35:40
  Speaker A: I know that in most things in life, if you just sweep the problem under the rug for a long enough period of time, it just goes away. Right. Henry, isn't that how it works?
• 35:48
  Speaker B: The mountain just gets bigger?
• 35:51
  Speaker A: I think for most things in life, usually the problem gets bigger. And maybe that won't happen here, but one could elude and consider what, what's happened over time. There's a high probability that maybe the problem actually gets bigger, not worse or sorry, it gets worse and not better. It becomes more of a problem down the road.
• 36:09
  Speaker B: So let's just drill into a little bit of this AIP penalty. So let's just use an example. In the middle of the screen here, you'll see the income of the individual is 100,000. And again, these are estimated tax numbers. Not exactly what you would get for filing taxes would be 26,000. So the net income, 73,000 average tax rate is 26.35%. 26 divided by 100 is the average tax rate. Now what I want to just tie upon is this marginal tax rate, which is 33.89. So that means any additional income. On top of that, you start get, you start triggering this higher tax rate and what is being plot against, you're not getting taxed at 26%, you're getting taxed at an extra 1000 will be extra 100 will be a 33 $89 tax on that hundred dollars.
• 36:55
  Speaker A: So basically, for every, every hundred dollars earned, you're going to give up $34 moving forward above $100,000. Now this is based on Ontario example, I believe.
• 37:05
  Speaker B: Yes, correct. And that number goes up each layer of the brackets you run into. So now I'm going to use that $20,000 and that's getting added to this particular individual's income. So first you'll see the tax goes up from 26 to 34,000 and you'll see that marginal tax rate is 43%. So you think it's a 2% increase of 26.35 to 28.7. It's about 2%, 2.35% increase, but it's not actually 2.35%, it's $8,000. $8,000 of the 20,000 is being taken away from you in the form of.
• 37:43
  Speaker A: The taxes, which is actually 40, almost 41%. So for, yes, you get the 20,000, but you actually don't get the 20,000 because you only get 41% of it has to disappear to the government. And then on top of that, now you also have to pay that penalty as well that you indicated.
• 38:04
  Speaker B: So the 12,000 would be what you actually get to keep 8000 goes to taxes or the 40% and then that 20,000 is applied on that penalty. So that's an extra 4000. So the whole 20,000 that you believe you got to gain your tax bill is actually 12,000. So you only got 8000 of the 20,000.
• 38:23
  Speaker A: And you've got about, roughly speaking, 15 to 20 years worth of time that you cannot make up. So not only do you have this tax problem created, you can earn more money, you can grow more investments, you can do a lot of things. What you can't do is make up the time. Unless you're Marty McFly, you're not going to jump in your DeLorean and go back in time and solve all the world's problems by playing, playing rock and roll guitar. You know, you need to. That's, that's something you just can't fix. So the decisions that you make early on and when you're getting involved in an REsp program, you have to recognize that your future decisions, and it's not just yours, it's also your child's future decision or your, perhaps your grandchild's future decisions are things that you can't control. You can't control the market, can't control the economy, can't really control the political environment. You also can't control the government changing the rules on plans that they create. So there's a lot of areas where you don't have the capacity to really provide undue influence onto the outcome that you want. And so, shifting gears, we want to consider where can you have a higher degree of influence on the outcomes and have far degree of higher control to be able to implement the things that you actually want to do regardless of what your child decides they want to do. And I think that's really the direction that we want people to go so that they can have autonomy, peace of mind, freedom, and just in general have that feeling of complete and total decision making power at their hands.
• 40:05
  Speaker B: Yeah. One of the things we just want to encourage is to give your child the ability to make their decisions that is best for them. I think by that age they are able to think for themselves and they shouldn't be pigeonholed to forced to make a decision to go to, let's say a post secondary school to make sure that they get the grant money. That is definitely one thing that is pretty important to see. The second thing is just based on the mechanisms, on the structures, how it's been designed, that you are basically forced as a choice not explicitly written to if you want to avoid the penalty or the tax bill, to roll it into the RSP and again push the can down the road and that already, just at that moment of evaluation should be a very important evaluation of recognizing that this moment something's not right. And if I kick the can down the road again, is that going to be better in the future? If the plan was designed for your favor, it should have been designed in a way where you can exit without any penalty. So these are just some things to just reflect on as we have, based on what we've just shared. So what does the other side of things look like where you have a lot more freedom of choice and option and you're basically going to build an extension to your family banking system. And what I've kind of put together is just using a pretty similar, most of my clients similar example of this is on one of their child starting at age five, putting 2500, the equivalent amount until 22 years. Now I made 22 years just for us as a discussion illustrating that, again, most people, they go through their program and then the resp ceases and that's it. But what if we also do the same stopping point? Well, let's take a look at one of those. First, just by relocating where the capital is being built, which is the family branch or their family system. So what you see is 2500 going in since age five all the way to age 22. So an accumulated amount of capital was 42,500. Now by virtue of the vehicle and the contractual guarantees built into the vehicle, the total cash value is 59,081. Now again, everybody's numbers are different and how we design it, it's important to have a proper discussion to bespoke the situation to yours. But this is what I'm just showing you from example, client situation. So on that 59,000. Now in that journey that that cash value is being built by the insurance company, you have the ability to borrow against that cash value to use it for the things that you want to use it for. So you're not restricted. And this is where we're talking about utilization. Do you need diapers? Do you need a car seat? I know Jason used his policies to fund a car seat in the early years. These are things that you're not restricted to the utilization of the funds, but the compounding is still going to grow uninterrupted. So this is just one thing I wanted to highlight here. Now the next thing is. So what does it look like now? Well, the resp has a fixed finite period which it can be utilized and there's also a maximum cap that money can go in. Well, there's no cap on this one other than the choice that you've decided how much you wanted to start with. And once you have it started, when it's funded properly, this asset, without eroding or breaking it down, it's still going to have the inherent characteristics where the cash value is going to continue growing. So I just kind of wanted to show at year 22, the only amount that has accumulated is 4200, 5590. Eight. One was the amount that the cash value was at then. Now 23, no money's gone in. Cash value is 61,846. So no money's gone in, but it still went up tax free inside the asset. No money has gone in year 24, it's gone up. 64,060, 7000. What does it look like at the person's age? 30, 85,000. What is the, what does it look like if the person is at 41, 37, 945? Again, this is not also, this is just the vehicle still growing uninterrupted and you can actually utilize it for other things as part of the journey. Maybe by 25 they find someone special and they want to get married. And that's the fund that you're going to also tap into to fund the wedding. Maybe when they're 40 and they have to fund a down payment maybe, or an additional home, or maybe I'll use 30 as an example. Then that's also an additional fund that you can tap into for purposes of helping support the down payment for their home.
• 45:16
  Speaker A: One even going a little bit earlier if it's at that 22 stage. And maybe they aren't interested or they've made a decision that they're going to go to a trade school or whatever. Let's say they want to go become a welder as an example, and they use that to fund buying a welding truck with a welding rig, a used one, so they can actually start their own business, and then they can level that up into buying even an additional one. So those are the options that the scene versus the unseen. These are the things that we have to. We don't know what's going to happen in that unknown future, but if we take away options, we certainly can't add more in. So we're talking about a direction here where we're adding options, we're adding possibility and flexibility into life's plan that, you know, may or may change and divert. And so we want to make sure we have all that available for our children, right.
• 46:07
  Speaker B: And now let's kind of extend that further and just talk about, because of the type of asset we have, we have data in front of us that with reasonable precision, not saying it's exactly going to play out this way, but reasonable, good precision that gives you enough indication, because it's contractually guaranteed and is bound by the insurance company, that the impact of making a decision, we can see the values of that impact. So remember, that cash value is 85,000. Again, no additional fuel is going in. It would be 137 945. And now what if the child lives all the way to 90, the value is 1.6 million. So if you put in 42,000, the value is 1.6 million. That's the impact of the unseen that people don't actually really see just by making the choice of where they put the money, where they put the money in the particular container or the asset. And if the child lives all the way to age 100, you've just set up for 42,000, in this particular example, a decision that set them up for almost 2.5 million. By age 100, it has profoundly impacted. So just to kind of summarize it really quickly, starting it properly in this way, up until age 22, 42,000 has gone in. And the vehicle, just by nature of how it is in this example, got to almost 2.5 million. So just wanted to really highlight the impact of rethinking how things have been told to you and just to take some time to make. It may not seem high stakes, but it just looks as this way and how we were just walking you through today in the context of the situation in the path and journey that your child will go through, looking at the impact of making just that choice and what kind of a different trajectory that choice led to, because you haven't closed and defined the options for your child.
• 48:10
  Speaker A: I want to add to this a little bit more. A while back, I did a. Did a video where I walked through, you know, my own family system, and I looked at policies I have on my, my kids. I actually have two policies on each of my kids presently at the time of this recording, and the, those are policies that I own and control. My kids can't own and control them yet, and I get to decide if I hand control over to them or if I make them request access to the family bank. And so in my world, we're going. Going to have more of an access discussion than we're going to have. Hey, here you go. Here's this thing I created for you, because I want to make sure I can maintain incentive and stewardship over that, that capital that I've put in for their benefit as long as possible. And there's going to be certain behaviors. I want them to demonstrate, to prove that they're going to be capable and follow the rules and the mindset that we've set out. And so I want to maintain that control for a longer period of time. It's not that I'm a control guy, it's just, it's important. It's something I want to be able to steward for their, if it's just for their long term benefit, we have to make sure that is the case. Now, that also means my wife and I get to utilize that system for many things while they're young and even when they're old, because eventually we're going to get old. So I can choose to use that as part of a supplementary passive income source on my kids policies for my own income if I want. That means I will be utilizing it. And then when dad goes, there's going to be a tax free bent, a lot of tax free benefits show up, and there's also going to be other estate value created at my passing. And my kids will take care of, they will inherit that. As long as they're a good steward and they don't do anything silly where I cut them out of the will. Probably not going to be the case. But, you know, I'm just saying, fair warning, kids, when you watch this, when you're older, listen to dad. Okay? Listen to dad. So that'll self fulfill, it'll allow them to replenish what I've used so that they can now reuse it fundamentally. And that allows far greater capacity in not only thinking in potential, in decisions around how we can utilize capital at various stages of life. In the discussions that I have with my own children, how interactive we can be in discussions around money in the family, these are all ripple effects that are created just by instituting this model of behavior and this type of a product choice in the whole life insurance that we can implement so many additional things over and beyond just saving for education. So we started our conversation about the concept and the objective of saving for a child's education. But we need to remove those boundaries. We need to pull off the chains of mental restriction that we have around this idea of education. And by unpacking and unbundling that into what the potential is on a lifetime of utilizing money, funding for education is to allow your child the advantage of being able to create future income. That's really what the purpose of the education is. Otherwise why would we do it? It's for them to create future income. What about all the income's containment. So what if they can create a whole bunch of income but they can't contain any of it? If we get our mindset around the containment of all of the income, regardless of how big it is, then we are setting them up for the best possible success. And then we're pulling this education piece out of the equation and we're just saying as well as the ability to get educated. And that, I think is where we need to have our mindset. And so, Henry, final thoughts on that?
• 51:41
  Speaker B: Yeah, I mean, walking through this process is definitely a different way of thinking and just come to the fact that we do this all the time, especially for ourselves. And not only are you building a fund for diversity of usage and multitude of choice and how it's being used as a parent, if you get, when you do adopt this process, you're going to teach your child how to do it. And they by nature are also going to get educated on stewarding the process of what you are building for them. And you're not limiting your access and options by doing this. It's not an either or, it's an as well as. And instead of pigeonholing how you're doing following that process there, give yourself the option of opening and having yourself a lot more choice, not just for yourself, but for your children and their future. Because while you're building this fund today, they're not cheap to raise or nurture. You're going to need to tap into those funds. And why not tap into it while not interrupting the compounding by doing it? So, as I've shared with you the context of today's environment as it relates to post secondary education, it's getting very difficult to afford. And by following this process, you're also actually not going to fall into those lending criteria requirements and perhaps open a lot more financing options for the child too. So again, there's just a lot more flexibility at play by walking through, rethinking your thinking and the approach to this.
• 53:26
  Speaker A: Well, we hope you enjoyed this conversation today. We certainly enjoyed doing it. And coincidentally, we enjoy doing this a lot. So much so that we've got other videos, poof. Right down there. You'll see one that just got recommended. You should check it out. We put that there for you. Go ahead, dig in. Thanks for listening to the wealth without Bay street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode, where we continue to uncover the financial tools, strategies, and the mindsets that maximize your wealth.