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
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Thank you so much for this post! I have a 5 month old who just received an inheritance allowing us to fully fund his RESP. I was looking for analysis on the best way to do it (I was leaning towards fully funding right away b/c of the compound interest), and this helps solidify the argument.
One quick questions, though — I assume that the Plan 1, 6% should read “106,763″ and not “196,73″…
Hi Sarah,
I’m glad the article could be of help in making your decision. I wrote it because I found myself wondering what the best approach was to capturing all of that grant money and then ultimately realizing is it’s actually not worth going
after the grant money.
Now the only downside is you lose the ability to dollar-cost-average from contributing every year (mind you DCAing has proven to be ineffective as well but it makes us feel better) and you run the risk that you invest at a high point in the market if you do the lump sum payment. You might be able to mitigate this with a conservative portfolio and annual rebalancing though I haven’t crunch those numbers myself to confirm if that’s true but that’s the theory.
I’d also like to thank you for pointing out the typo. The amount is actually “$117,957″ so I don’t know where I got that other number from . You’ve got to be careful with that copy and paste.
I wonder if you considered the current value of the scenario 1. It should be less than the $50,000 one time contribution. The later year’s $2,500 will have less current value depend on your discount rate. Could it possible be that 1. lose to 8. because you’re actually contributing way less?
Hey PC,
Inflation and the value of money does play big part in how the contributions affect you financially in the present (ie. contributing $50k now costs a lot more then contributing $50k 10 years from now because $50k will be worth less in the future). However it has very little barring on the final outcome. The difference is simply the outcome of compounding returns. The more you contribute early on the longer it has to compound and grow.
It looks like what you’re saying is that the extra grant money you’d get by contributing every year over the life of the plan isn’t sufficient to offset the compounding time lost by keeping that money out of the market.
But I question what the right approach is if you have 50k right now. What if you put that 50k in a non-registered account and pull say ~$3k out yearly for 17 years? That way your $50k is in the market for the whole time period, but you also get all the grant money. The only downside are the tax implications, but it might still come ahead of the “drop $50k in the RESP off the bat” plan.
Cecil,
Unfortunately taxes always get you. Assuming even a low tax bracket of 33% you would get taxed $1k and the grant will still only be $500. Now I will say that you might be able to take that approach via canadian dividends but you may need to earn as much as a 6% yield and you would have to been in the right tax bracket. I think its something very difficult to acheive in good times when yields are super low. I think at that point you might be exposing your childs education to to much risk.