The RESP is just an account with some tax rules around it. It is how the money that is deposited into this account gets invested that will make it a halal RESP or not. The focus here should not be the account type but the underlying investments. As long as that cash is being used to buy Shariah-compliant investments such as the Manzil Mortgage Fund then you should be able to sleep peacefully at night.
Registered Education Savings Plan (RESP)
Don’t be like your parents and set your child up for the future the halal way.
Did you know that Muslims have double the national Canadian average when it comes to post-secondary education? I wasn’t surprised when I read that stat. My parents sacrificed everything to come to this country for the sole purpose that their children would get a proper education in the hopes of becoming a Doctor or Engineer (sorry mama and baba). I’d like to think that all other professions are equivalent because at the end of the day we should be respected for what makes us happy right?
How many of us took student loans from the government or bank with interest (riba) because we had immigrant parents that had limited financial resources or the wherewithal to understand government programs that were available to them to save for our post-secondary education. Well, as first-generation Canadians, we don’t have this excuse anymore.
RESP stands for Registered Education Savings Plan and is an investment account for the sole purpose of helping a child pay for college or university. The main benefit is the ability to invest in the plan without paying tax on investment gains until you start to take that money out to pay for tuition. At that time, only the profits are taxable, and only in the name of the child and if they’re not earning any income at that age then there won’t be any tax payable.
Free money from the government
If you thought that was a great feature, let’s talk about the Canadian Education Savings Grant (CESG). This is a government program that will match 20% of your RESP contributions; there is no better guaranteed in the market today. The maximum grant is $500 per year with a lifetime maximum of $7,200 per child meaning you shouldn’t invest more than $2,500 annually (although you can catch up two years at a time if you’ve never opened one) and $36,000 before your child turns 16.
If you invest $208.33 per month or $2,500 per year plus the 20% CESG you would receive from the government for the time your child is born with a long term average growth rate of 7.2% you would have close to $100,000 in your child’s RESP. This only happens if you start early because compounding returns play a huge role here and it’s best if you can invest on a regular basis (weekly, bi-weekly, monthly). I personally invest $50 every Jumah (Friday) for each of my boys and just forget about it. You will be amazed at what it will grow to over a short period of time.
Another financial hack is to use the Canada Child Benefit (CCB) that the federal government provides you monthly and invest that into your child’s RESP. If it is enough for the full $208.33 that essentially the government is building your child’s education fund and if it’s less than that, they are at the very least subsidizing it on your behalf.
An RESP can remain open for 36 years so there is plenty of time for your child to get into a post-secondary school before then and if it does not happen at all you can generally transfer the account to another child, or to your RRSP (minus the government grants).
Group RESPs are not Halal
If you are already in a Group RESP or being offered one you should know that this is an outdated financial product that thousands of Canadians still purchase every year. Not only do they have unnecessarily high fees, low investment returns, and strict rules that can cause you to lose all of your investment gains and government grants, they can only invest in interest (riba) based financial instruments like GICs (Guaranteed Investment Certificates), Government Bonds, and mortgages. Because you cannot control the investment holdings you should stay away from setting up such accounts.
At the end of the day, it all boils down to discipline and values. By investing in halal RESPs, you’re voting for ethical investments that are in the best interest of not only Muslims but humanity at large! So let’s do this. Put a plan in place and start saving today for your child’s education, and do it in a way that aligns with your values as a Muslim and as a human being overall.