Yahoo Finance 'People need to know this is a possibility': One way you can supercharge your RESP
Saving for a child’s post-secondary education is becoming increasingly challenging, with the average cost of a four-year university degree in Canada expected to climb past $100,000 within the next 15 years, according to some forecasts.
Registered Education Savings Plans (RESPs) can help by allowing savings to grow in a tax-deferred manner and providing government grants that boost contributions. But experts say Canadians may not be using the plan to its full potential.
How the Canada Education Savings Grant works
One of the ways the government incentivizes the use of RESPs is by matching 20 per cent of contributions through the Canada Education Savings Grant (CESG). However, it’s important for Canadians to understand the CESG limits, says Blair Evans, assistant vice-president of tax and estate planning at IG Wealth Management in Winnipeg.
Generally, the government provides a maximum annual grant of $500, paid on the first $2,500 of contributions each year, up to a lifetime grant of $7,200.
“If you’re making a large contribution now, and then not making a contribution for the next few years, you might not be optimizing the grants,” Evans told Yahoo Finance Canada in an interview.
Given the annual grant limit, contributing $2,500 per year has become the “standard” way of funding an RESP, says Andrea Thompson, founder and certified financial planner at Modern Cents in Toronto. In some cases, it’s all her clients believe to be possible. But she says it’s far from the only funding strategy.
For many Canadians, opening an RESP and contributing any amount is a good place to start considering the current economic climate, she stresses.
“Just get into the habit of making a contribution,” Thompson said in an interview with Yahoo Finance Canada. “You don’t have to start off by maximizing it every year.”
Lower-income families may also be eligible for the Canada Learning Bond (CLB), issued through an RESP, even if they haven’t made any contributions. The federal government’s 2024 budget proposes to automatically enrol eligible children in the CLB if they don’t have an RESP opened by the age of four, but that won’t take effect until 2028-29.
“So, it’s important to just get one open,” Thompson said.
A different strategy: Contributing more, early
Conversely, families with extra capital available may benefit from making larger contributions, Thompson says. Although the CESG only applies to the first $2,500 contributed each year, up to a total of $36,000, the lifetime contribution limit for an RESP is $50,000.
“You can put that $50,000 in at any cadence that you deem fit,” Thompson explained.
One strategy is to contribute the full $50,000 in the first year, she says, even though this means forgoing all future grants. Assuming an annual return of five per cent, this approach would yield the largest account value by the time the child turns 17, as per Thompson's calculations.
“That’s because we have so many more years of potential tax-deferred compounding on a much larger asset,” Thompson said. “So, you’re really sacrificing the CESG in hopes that whatever growth you’re going to get on the $50,000 is going to well supersede what you would have been able to get from the government.”
Ultimately, Thompson says the idea is to use the full $50,000 of contribution room, whenever possible, to maximize the growth potential of the account. Since contributing $36,000 over 15 years nets the maximum CESG amount, another strategy is to deposit an additional $14,000, ideally in the early days, on top of the annual $2,500 contributions.
“It can be sporadic, and it doesn’t necessarily have to be planned systematically in advance,” Thompson said. “But I think people need to know this is a possibility.”
How to invest within your RESP
To determine the best approach, Thompson stresses the importance of evaluating your entire financial picture. For starters, she says you need to know how much you can afford to save, and how you want to prioritize education savings over other financial goals.
The amount you contribute to an RESP beyond $36,000 may also depend on whether or not you’ve maxed out your Tax-Free Savings Account, she adds. Then, she says it’s a matter of determining what portion of the beneficiary’s post-secondary education you want to fund.
For instance, if you want to cover room, board, and tuition, contributing $2,500 per year “isn’t going to get you close to funding all of that.”
Determining how to fund an RESP is only one part of the equation. The second piece is how to invest within the account. Like most investment decisions, Thompson says this ultimately depends on when you need to access the funds.
“The closer you get to the goal, the less risky the account ought to be,” she said.
Then, there’s the question of withdrawals. As Evans explains, your original RESP contributions can be withdrawn tax-free, whereas the government grants and investment income are taxable to the beneficiary, or student.
It often makes sense to withdraw the taxable portion first, according to Evans, since students are usually in a lower tax bracket in their early years of schooling. But he says there are numerous factors to consider, like how many years the student is going to be in school for, any other income they’re earning, and what types of credits they’re eligible for.
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.
