There are many reasons to consider a Registered Education Savings Plan (RESP) to save for a child\u2019s future education: tax-deferred growth within the plan, earnings taxed at the child\u2019s tax rate when eventually withdrawn and, of course, the Canada Education Savings Grant (CESG). The CESG consists of funds paid into the plan by the federal government as a 20 percent matching grant, to an annual maximum of $500 ($1,000 if there\u2019s unused grant room from a previous year) and a lifetime maximum of $7,200 per beneficiary. There are no annual limits on RESP contributions, however the lifetime limit is $50,000.<\/p>\n
Conventional wisdom suggests we should take advantage of the CESG \u2014 after all, it\u2019s essentially \u2018free\u2019 money. But is this always the best decision? One way to maximize the CESG involves contributing $2,500 per year over 15 years to receive the full $7,200 in grants. However, will this achieve the greatest outcome for the RESP?<\/p>\n
To answer this question, let\u2019s compare Investor 1, who gradually contributes and maximizes the CESG, and Investor 2, who contributes a lump sum amount and doesn\u2019t maximize the CESG. The outcome may be surprising. Both investors are assumed to earn an annual rate of return of 5 percent. Investor 1 contributes $2,500 each year starting in the first year of the child\u2019s life until year 20, to a maximum contribution of $50,000, and receives the full $7,200 CESG grant. After 20 years, the RESP produces $43,655 of growth, resulting in a value of $100,855. Investor 2 contributes a lump sum of $50,000 \u2014 the full RESP limit \u2014 in the first year of the child\u2019s life, so the RESP receives only $500 of CESGs. Yet, the RESP grows to $133,992 over the same period.<\/p>\n
This shows the profound impact of compounding over time. Front loading the initial contribution yields a larger outcome, even without receiving the full CESG, all else being equal. Despite lower total contributions (funds paid into the plan plus CESGs) for Investor 2, or $6,700 less in CESGs, the outcome is $33,137 greater.<\/p>\n
A Lesson for the RESP \u2014 And Investing in General<\/strong><\/p>\n Of course, not many investors have $50,000 of discretionary funds at the start of a child\u2019s life. As such, maximizing the CESG where possible is a prudent strategy. Yet, this example illustrates why, as advisors, we often remind investors not to overlook the impact that compounding can have over time on any investment \u2014 not just the RESP. One takeaway? The sooner you start, the more time funds have to grow and, when it comes to growth, the larger the initial investment, the better!<\/p>\n Illustrative: RESP Gradual vs. Lump Sum Contribution<\/strong><\/p>\n <\/p>\n *Assumes 5 percent annual compounded growth.<\/p>\n","protected":false},"excerpt":{"rendered":" There are many reasons to consider a Registered Education Savings Plan (RESP) to save for a child\u2019s future education: tax-deferred growth within the plan, earnings taxed at the child\u2019s tax rate when eventually withdrawn and, of course, the Canada Education Savings Grant (CESG). The CESG consists of funds paid into the plan by the federal […]<\/p>\n","protected":false},"author":129,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_oasis_is_in_workflow":0,"_oasis_original":0,"_oasis_task_priority":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-2467","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"acf":[],"yoast_head":"\n\n\n
\n <\/td>\n Investor 1 \u2013 Gradual Contributions<\/strong><\/td>\n Investor 2 \u2013 Lump Sum Contribution<\/strong><\/td>\n<\/tr>\n \n Year<\/strong><\/td>\n Annual Contribution<\/strong><\/td>\n CESG Received<\/strong><\/td>\n RESP End Amount<\/strong><\/td>\n Annual Contribution<\/strong><\/td>\n CESG Received<\/strong><\/td>\n RESP End Amount<\/strong><\/td>\n<\/tr>\n \n 1<\/strong><\/td>\n $2,500<\/strong><\/td>\n $500<\/strong><\/td>\n $3,150<\/strong><\/td>\n $50,000<\/strong><\/td>\n $500<\/strong><\/td>\n $53,025<\/strong><\/td>\n<\/tr>\n \n 2-20<\/strong><\/td>\n $2,500<\/strong><\/td>\n $6,700<\/strong><\/td>\n $100,855<\/strong><\/td>\n —<\/strong><\/td>\n —<\/strong><\/td>\n $133,992<\/strong><\/td>\n<\/tr>\n \n Total<\/strong><\/td>\n $50,000<\/strong><\/td>\n $7,200<\/strong><\/td>\n $100,855<\/strong><\/td>\n $50,000<\/strong><\/td>\n $500<\/strong><\/td>\n $133,992<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n