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:
| Plan | Contribution | Grants Recived |
3% | 4% | 5% | 6% |
|---|---|---|---|---|---|---|
| 1 | Year 1: $16,500 Year 2 - 14: $2,500 Year 15: $1,000 |
$7,200 | $81,857 | $92,397 | $104,366 | $117,957 |
| 2 | Year 1 -18: $2,777 | $7,200 | $74,569 | $81,722 | $89,688 | $98,564 |
| 3 | Year 1 - 10: $5,000 | $5,000 | $79,660 | $90,056 | $101,766 | $114,950 |
| 4 | Year 1 - 5: $10,000 | $2,500 | $81,751 | $94,522 | $109,156 | $125,907 |
| 5 | Year 1 - 3: $15,000 Year 4: $5,000 |
$2,000 | $82,868 | $96,521 | $112,271 | $130,415 |
| 6 | Year 1-2: $20,000 Year 3: $10,000 |
$1,500 | $83,068 | $97,130 | $113,408 | $132,227 |
| 7 | Year 1 - 2: $25,000 | $1,000 | $83,020 | $97,359 | $114,003 | $133,297 |
| 8 | Year 1: $50,000 | $500 | $83,445 | $98,332 | $115,692 | $135,909 |
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?
-mfd-
If you don’t know what an RESP is please see my post HERE or Four Pillars RESP series HERE
