Strategies for your Registered Education Savings Plan (RESP)
The costs of post-secondary education continue to rise and wise parents will start saving early to manage this major expense for their children. A Registered Education Savings Plan (RESP) is a government sponsored savings program that can be a powerful tool to achieve education savings goals. The RESP allows for tax-deferred growth of investments in the plan and income splitting for tax purposes when the child begins to withdraw funds for education in the future.
One feature of the RESP is the Canada Education Savings Grant (CESG) which can top up annual contributions by 20% up to a lifetime limit of $7,200 per student. With federal government funds on the table, many parents strategize to maximize contributions annually to the extent that the maximum grant will be received over time.
But is this the most effective way to accumulate savings for education?
Components of an RESP savings program
There are three main components of an RESP savings program:
- Capital contributions, to a lifetime maximum of $50,000 per child;
- The CESG, which is calculated as 20% of annual contributions, to a maximum of $500/year; and
- Accumulated growth in the RESP investments over time.
While an annual contribution of $2,500 will maximize the $500 CESG in a year, the CESG would be maximized by year 15 while there would still be room to maximize the lifetime capital contribution allowed.
Different approaches to saving to an RESP
Maximize CESG in first 15 years
Parents contribute $2,500 per year to the RESP until year 15 and the maximum CESG of $500 is added to the account annually until it is maxed out at $7,200 in year 15.
Head Start Plan: Maximize Lifetime Capital Contributions as well as CESG
Parents contribute $16,500 in year 1, then $2,500 from years 2 to 15 to reach the maximum lifetime contribution of $50,000 and the maximum CESG of $7,200.
Superfunded: Maximize Lifetime Capital Contributions in Year 1
Where funds are available, the parents contribute the full $50,000 of capital in year 1. The plan will only receive $500 of CESG for that first contribution.
The power of compounding growth
It seems counterintuitive to pass up on the federal grants available under the RESP program; however, where funding is available in the early years, it is important to remember the power of compounding growth within a tax-deferred savings plan like the RESP. The more funds you can contribute to the plan earlier in the savings period, the more funds will be available for your child’s education when they are ready for post-secondary studies.
Contact your Advisor to help plan for your child’s future.