Wednesday, January 9, 2013

On RESPs, EAPs, Grants, Gains, and Morons

Okay, maybe "moron" is a little harsh.  I just finished a painful conversation with a banker.  We argued for over an hour before he asked a superior and conceded that I actually know what I'm talking about.  Here's the deal...

ETA (Jan 10) - Okay, wait!  The following shouldn't have happened at all according to Rob Carrick AND according to the Canada Revenue Agency.  I'm still waiting for National Bank Securities to explain themselves - or for the agent I spoke to to apologize for an error that maybe had nothing to do with company policy.  And I could be out $5,000.  I'll keep you posted.  Anyway...

ETA MORE (Jan 13) - The following shouldn't have happened but for a different reason.  I got an e-mail from National Bank Securities, and they showed me the complicated formula and insist it's government imposed.  SO why doesn't the Canada Revenue Agency know about that??  BUT we're NOT back to (as I'll get to later):  if you withdraw the EAP portion in a family plan, you have to ask for a little bit at a time in hopes you don't go over,  BECAUSE the last person I spoke to at NBS completely understood what I was on about, and said she solves this problem by making a note to tell the "formula people" when someone's close to the maximum grant, and they make sure it's the full amount. Rob Carrick wasn't precisely right when he told me I could "specify the breakdown of the money", but what you CAN do, is specify the amount of grant you want, and they can figure out the formula from that figure instead of the total figure then give you the total amount later.  Too bad that first guy just didn't get it.  The problem isn't the formula, it's that some agents at NBS don't understand how to use the formula to help the customer.  Anyway... back to the beginning...

I'm at the wondrous point of withdrawing RESP contributions.  It's a tricky, tricky thing to do.  It shouldn't be, but it is.  I'm going to explain it all right here for anyone googling for advice.   First of all, if you've got a kid under 18, get an RESP - you can backpay for a few previous years if you've missed out on this windfall.  It's well worth the automatic 20% gain.  But there's a lot of information out there that explains it all from that end.  Here's what's harder to find - the withdrawing bit:

The RESP funds sit in two accounts:  the PSE (what you contributed) and the EAP (the government grant and interest gained).  As soon as your kid starts school, you can take as much of the PSE as you want, and many advisors suggest taking it all in case your kid drops out of school (in which case it's much harder to access).  That's what I did.  AND I have a family RESP so the PSE was whopping.  Then I invested it all elsewhere in funds that are easier to access (and have a higher interest rate).  The PSE is tax free (it's just your own money coming back to you), and the cheque is payable to the parent.  Gail Vaz-Oxlade was really wrong that you're penalized for this.  You're not.  Take it all.  See this comment on that post for clarification.  And see also Jeff Stuart's previous comments and how snippy Gail got with him.  Two financial advisors requested that she post a retraction, but she didn't.  So be really really careful about the misinformation going around about all this.  Keep in mind, you're right now reading financial advice from a philosophy-light blogger (and also a fellow parent likely in your shoes right now).

Now the REALLY TRICKY PART:  The EAP is made up of the grant (max $7,200 per kid) and the gains (all the interest).  This is taxable income, but, luckily, cheques are made out in your kid's name, and, hopefully, they're in a much lower tax bracket than you are.  When your kid starts school, you can only take out $5,000 of the EAP for the first 13 weeks of term.  This isn't a big deal.  You want to split up the EAP into different years anyway to make sure your kid avoids paying taxes on it.

BUT with some brokers (like NBS) you can only ask for an amount generally (as opposed to requesting a certain amount of grant or gain), and you'll be given part of the money in grants and part in gains.  Apparently, it's divided in a way that no financial advisor is privy to (none at National Bank Securities at any rate).  It's a BIG MYSTERY how it's divided.  So, with that $5,000 cheque I got last September came a form explaining that it was made up of approximately $2,000 in grants and $3,000 in gains.  They said the exact numbers, I'm just rounding off for simplicity sake here.  It's about a 40/60 split, but the guy I just talked to for an hour suggested that it's different every time, and it's unknowable how it's calculated.  It's A SURPRISE!!

*** If anyone knows this secret formula, please, please tell us how it works!***
ETA - It really is complicated, but it's not a secret.  It's here if you want to check it out.  And, unfortunately for NBS, it's only a surprise to the agents who talk to customers.  They have no idea how it works.  ** TIP ** - don't authorize the transaction UNTIL you find out the exact grant and gain amounts.  The dude on the phone can find someone who can help them figure it out.  That's their job.

Because, here's the thing.  If you take out more than the maximum $7,200 per kid, the government will take any extra you accidentally withdraw and KEEP IT!  Ha!  So you have to be careful not to take out too much, right.  BUT you can't ask for a specific amount of grant.  You have to ask for an EAP amount, and hope for the best!  Or you can take out a little bit multiple times, but each time you have to go through the run-around of proving admission and all that crap.  At the end of the hour, when this guy finally sort of understood my concern, he suggested we follow this 40/60 split formula even though it's not clear that's how it will be divided (not clear to him, and I can't find any info online about it).  So, now the really funny/sad/frightening part of the conversation:  

I need to take out $5,200 in grants (sticking to previously rounded figures for sake of argument here), but not a penny more, and it's likely they'll give me about 40% grant as part of the payment.  So I asked, figuring he's got a calculator nearby:  "Okay, how much will I have to ask for in order for the grant part to be $5,200?"  He said, "$2,080."

"No, no, no.  I want the grant portion of the cheque I get to be $5,200, so  I'll need to take out ... $13,000."  I figured it out with a pencil as I said that.

Then he said, "Okay, well let's just try $14,000 to see if that would work.  (pause)  No, you're right, you'll need to ask for $13,000."

He was figuring out what number $5,200 is 40% of through trial and error.
(Pssst:  5,200 / 0.4 = 13,000.)

I hate to be so catty - sort of - but how did someone become a financial advisor and not understand basic math.  I have a degree in philosophy for crying out loud (not that there's anything wrong with that), but even I can remember back to grade 10 math or so.  And, the whole point is: that it is SO BLOODY LUCKY for me that I can.  If I trusted this guy, I'd be taking money out over and over trying to get to the full grant portion.  He was convinced, for about 53 minutes, that I should take out $5,200 even though he'd then follow that statement with an explanation that only some of that would be grant.  Told you it was painful.

BUT - I trusted him a little.  I'm still not confident that this 40/60 grant/gain split is accurate.  If it's not, then I could get too much grant money and have to pay it to the government.  And that, oh my best beloved, is called a scam!!  But I'll let you know if it all worked in about a week or so.  I actually ended up only asking for $10,000 just in case.  Then I'll be doing it again for the rest (maybe) once I get that cheque.  Scary!!  And uber-frustrating!

At least I was a little vindicated when he finally started understanding what I was getting at.  At first he kept huffing when I'd ask him seemingly the same questions over and over.  And I actually got to the point of telling him his overt exasperation with me was poor customer service and he might try to hide it better in future.  Ha, ha.

The other frustrating part about National Bank Securities (formerly Altamira) is that the advisors aren't allowed to give you their own e-mail or an extension number.  So if I e-mail the information, I have to send it to the office in general and wait a few days for the guy I was talking to specifically to get the e-mail forwarded to him.  AND I can't call him back at my convenience - or ever - because he doesn't have an extension.  I have to wait for him to call me.  W.T.F.???

Another bit of useful information:  To get the cash, you need to send your financial advisor proof of admission to a credited university or college, that has ALL of the following info:  University name and address, student's full name, full-time or part-time, the session (fall/winter/spring), and the name of the program.  I just took a few screen shots of her timetable and other info online.  My claim got held up, though, because the university letterhead doesn't have the address.  So I had to send yet another screen shot with admission forms that have her name, and the university and address.

I'm shocked at the ignorance of some bankers, but I suppose it's the same as any other field - some are better than others.  It's just that, I guess, you'd think a bad banker would lose his/her job sooner somehow so there should be fewer of them.  But it doesn't work like that.

This isn't the first run-in I've had like this.  I was renegotiating my mortgage once because the banker at CIBC called me in when rates went down.  I asked a reasonable question that everyone should ask in this situation:  Will the penalty I pay for re-negotiating the mortgage be greater than the money I save from the lower interest rate?  Since I was paying off my mortgage faster by paying off a lump sum every January, she told me that it would be impossible to figure that out.  I used a pen and paper to show her how it works.  Just because your computer can't do it, doesn't mean it's impossible.  It turned out the penalty would have cost more than I would have saved, and she was very apologetic (and I want to believe authentically so) for dragging me in there for nothing.  I'm sure they screw people over, knowingly or unwittingly, by getting people to pay penalties to re-negotiate for lower interest rates when it's not in their favour to do so.

The moral of the story:  Do your homework, kids.  Especially in math class.  Geesh! 

Sorry for all the LOUD letters here, and thanks for listening to me rant!

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