One of my retirement goals is to help my children with their education. My intention has always been to contribute the maximum ($50,000) to their RESP because I don’t want tuition and debt impeding my child’s potential.

I started to look at various ways to optimize my contributions for maximum return in the RESP. After crunching the numbers it became apparent that structuring your contributions in order to get all of the CESG money may not be the best thing for the RESP account. The table below shows different contribution schedules, the amount of CESG grant money you’ll receive, and the final balance at different rate of returns after 18 years:

How the Plans work?

At minimum it takes 15 years of contributions to get the full $7,200 in grants. In plan 1 you would have to contribute the $2,500 yearly to get the yearly maximum of $500 from the CESG for 14 years. After which you would have $7,000 and would need to contribute another $1,000 in year 15 to get the remaining $200 in grant money. However at this point you’ve only contributed $36,000. Since the goal is to maximize the RESP contribution, you would contribute an additional $14,000 on top of the original $2,500 in year 1 for a grand total of $50,000 in contributions and $7,200 in grants.

In plan 2 you would contribute $2,777 ever year for 18 years. In the end you will receive the $7,200 in grants and contributed the maximum of approximately $50,000.

In plans 3 through 8 you shift the focus away from the CESG money and all you care about are the contributions. In plan 3 you contribute $5,000 a year until you reach the maximum of $50,000. Each subsequent plan increments the yearly amount by $5,000. The amount of grant money changes based on the number of years it takes to reach the $50,000 mark.

Conclusions?

Its clear from the table that dividing the contributions equally over 18 years (plan 2) is the a big loser. Even with a rate of return of 3% and the additional $7,200 in grants, plan 2 lags far behind the rest of the contribution schedules.

Plan 1 doesn’t fair much better. At 3% it beats plans 3 and 4 but by 4% it only beats plan 3. This is the one I intended to pursue btw as it’s more practical with my budget.

The big winner is plan 8. Contribute the whole $50,000 in year 1 if you can muster it. You’ll only get $500 in grant money but as long as you can earn a rate of return greater than 2.57% you’ll beat the plans that try and capture all of the grant money.

Once again, as in all things financial, the free lunch isn’t always the best thing for your health. Contribute as much as you can as soon as you can to your child’s education fund and let compounding growth work its magic.

After reading this how do you plan to contribute to your child’s RESP?

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If you don’t know what an RESP is please see my post HERE or Four Pillars RESP series HERE

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What is an RESP?

RESP stands for Registered Education Savings Plan. It is a register account that allows you to contribute funds towards your child’s education. The contributions will grow tax-free.

What are the benefits of an RESP?

1 – All contributions are allowed to grow tax-free over the life of the plan. Taxes will only be paid on the growth portion of the account and only when funds are removed to pay for your child’s education.

2 – Your contributions may be eligible for grants through Canada Education Savings Grant program.

What is the the Canada Education Savings Grant (CESG)?

The Canada Education Savings Grant (CESG) is a government program to encourage families to savings for a child’s higher education. The CESG program will contribute additional funds towards a child’s RESP based on the amount of funds contributed into the RESP.

What do I need to set an RESP up?

Simply apply at your financial institution of choice. However the beneficiary will require a Social Insurance Number to receive grants from the CESG program.

How much can be contributed towards an RESP?

There is no yearly contribution limit. You can contribute up to $50,000 in total per child over the life of the plan.

How much will CESG contribute?

The CESG will match up to 20% of your contribution per year for a maximum of $500 per child. Over the life of the plan the CESG will contribute a maximum total of $7200 per child.

How much do I need to contribute per year to maximize the grant additions?

You will need to contribute $2500 per year to receive the $500 grant every year.  Contributions can not be carried forward to claim addition grant money (eg. contribute $50,000 in the first year and receive $500 every year until you reach the maximum amount  of $7200).

Is there additional grant money I can take advantage of?

Additional funds can received via the Canada Education Savings Grant and the Canada Learning Bond. These additional funds are dependent on your household family income.  If you live in Alberta you can also receive funds via the Alberta Centennial Education Savings Plan. Please visit the CANLEARN for additional information.

Are my contributions tax deductible?

When you withdraw the funds from the plan only the growth portion is taxed. You will not pay taxes on the contribution portion which also means you will not get a tax deduction when you contribute funds.

How long can I contribute for?

Contributions can be made up to and including the 22nd year of the plan.

How long can the plan stay active for?

An RESP plan must be terminated on or before the last day of the 25th year in which the plan was established.

What is required to withdraw the funds for the beneficiaries education?

The beneficiary must show proof of attendance at an eligible institution. An eligible institution being full-time attendance in a designated university, community college, Canadian technical college or university outside Canada.

How are payments made?

The beneficiary will receive funds in the form of Educational Assistance Payments (EAPs). EAPS include investment earnings and grant money received from the CESG program.

Are there any limitations on what can be withdrawn?

The beneficiary can withdrawl $5,000, for the first 13 consecutive weeks of full-time studies.  After they have completed the 13 consecutives weeks, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them. If there is a 12-month period in which the student is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum applies again.

How are EAPs taxed?

EAPS are taxed at the beneficiary’s income bracket. The assumption is that as a student they are in the lowest tax bracket.

What if the beneficiary does not pursue post-secondary education?

There are three choices:

1 – Transfer the funds to another beneficiary under the age of 21. The CESG can be transferred as well if the beneficiary has addition CESG contribution room. If not then the CESG will have to be paid back.

2 – Transfer the funds to you or your spouses RRSP. You receive your contribution portion back tax free. The CESG portion will need to be paid back. Up to $50,000 of the investment growth portion can be placed into an RRSP as long as you have contribution room. However there are three conditions – you must be a Canadian resident, the beneficiary must be over 21 years of age, and the RESP plan must be in existence for at least 10 years.

3 – Receive the cash from the RESP plan. You receive your contribution portion back tax free. The CESG portion will need to be paid back. The investment growth portion will be taxed at your marginal tax rate plus an additional 20% surtax. Alternatively you can donate the investment growth portion to an educational institution.

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Four-pillar.ca has a great RESP series.  Check it out.

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