RESP: Earn $7,200 for Your Child’s Education – FREE

resp bank

Well, it’s September and another school year is upon us. While I may not be heading off to school my Facebook feed has been saturated with friends sending their kids to school. In honour of this occasion I wanted to bring to light a great way to save for your child’s education using the Canadian Registered Education Savings Plan (RESP).

The cost of post-secondary tuition (and beer) continues to increase at an alarming rate – the average cost tuition in Canada for 2014/15 is about $6,000 per year. Add in cost of living and school supplies the total cost can be closer to $20,000 per year.

The RESP was introduced by the Canadian government to encourage Canadians to start saving early and regularly for their child’s/dependent’s education. Via the Canada Education Savings Grant (CESG) the government will contribute a max of $500-$600 (depending on household income) to the plan each year. The grant is typically matched at 20% of contributions made by the parent. For example, if a parent contributed $5,000 in the year to an RESP for their child the government would contribute $500 in that year. The max lifetime amount the government will contribute to the plan is $7,200. (THIS IS FREE MONEY ON THE TABLE!) There is no annual maximum amount for parent contributions; however, there is a maximum of $50,000 lifetime contribution.

The CESG is available for children between the ages of 1-16 and may be available for children between the ages of 16 & 17 if some contributions have been made. That’s why it’s important to have a plan from the get go to maximize the grant money…sorry no Billy Madison’s allowed.

billy madison

Accessing Funds

Once the child (beneficiary) has been enrolled in a qualified program $5,000 may be withdrawn in the first 13 consecutive months. After this time period there is no restriction on withdrawals so long as the beneficiary does not have a break exceeding 12 months (…to “figure things out” on a beach in Australia).

If the beneficiary does not end up opting for the scholarly route the contributions may be withdrawn, but you’ll lose the grant money provided by the government. You’ll also be taxed on any investment gains your contributions may have accumulated.

Tax Effect

The original contributions by the plan sponsor are NOT tax deductible, therefore, when they are withdrawn there is no tax implication to the beneficiary OR the sponsor. Grant money and any investment income withdrawn from the plan (known as Educational Assistance Payments) will be taxed in the hands of the beneficiary/student. As most parents know, typically, the student earns under $10,000 in a year; therefore, there will be next to no tax on these EAPs for the student.

The Magic of Compounding!

Oh yes, I’m going to dive into a hypothetical example to satisfy my nerd accountant needs! Let’s say a parent contributes $2,500 each year for 18 years and received the $500 CESG grant. With a 5% annual return on investment here’s how it will look:

Contributions

Year Parent Grant Total Investment Gain RESP Balance
1           2,500           500             3,000                                75                     3,075
2           2,500           500             3,000                               229                     6,304
3           2,500           500             3,000                               390                   9,694
4           2,500           500             3,000                               560                 13,254
5           2,500           500             3,000                               738                 16,991
6           2,500           500             3,000                               925                 20,916
7           2,500           500             3,000                           1,121                 25,037
8        2,500           500             3,000                           1,327                 29,364
9           2,500           500             3,000                           1,543                 33,907
10           2,500           500             3,000                           1,770                 38,677
11           2,500           500             3,000                           2,009                 43,686
12           2,500           500             3,000                           2,259                 48,945
13           2,500           500             3,000                           2,522                 54,467
14           2,500           500             3,000                           2,798                 60,266
15           2,500           200             2,700                           3,081                 66,047
16           2,500               –             2,500                         3,365                 71,911
17           2,500               –             2,500                           3,658                 78,069
18           2,500               –             2,500

                         3,966

                 84,535
         45,000       7,200         52,200                         32,335

 

The key to success here is to plan early to take advantage of compounding returns and to make contributions that will max out the government grants. Even if your kid decides college/university isn’t for them you’ll still have access to your contributions and investment gains.

Recall that the government grants max out at $7,200. With the grants and investment income the $45,000 parent contribution is almost 100% match providing over $84k for the child’s post-secondary education. Within 20 years I figure this should cover 2-3 years education leaving the student with a little responsibility to cover the rest with summer jobs!

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3 comments

  1. All tasty info there! A few other considerations to optimize the RESP experience:

    – Much like someone nearing/in retirement , it is likely prudent to adjust asset allocation more heavily to fixed income as post secondary nears. Should the equity market take a dive right before starting school you’re stash will take a big hit and a rebound may take longer then little Timmy’s BA.

    – If little Timmy decides post secondary isn’t for him, another option available is transferring to a sibling (assuming each kids RESP isn’t fully topped up). This can help avoid/minimize the amount of investment income parents take into income at a presumably higher marginal tax rate.

    – Stick with solo plans rather then group plans heavily marketed by big banks. The nature of the group plans (as the name suggest) leave you at the mercy of the group in terms of return and fees jumping around, in other words take away all your autonomy. I’d rather have full control of asset allocation and known upfront and transparent fees.

    • Jonny

      Good points – I wonder how many parents encounter that situation where their kids don’t go to post-secondary and are left with a nice RESP fund. Depending on the avenue their kids takes it might not be such a bad thing after all!

  2. Intersting and useful stuff, Jonny.

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