Updated: May 6
Most individuals saving for their child's post-secondary education will do a standard deposit up to $2,500 per child per year to get the maximum annual 20% Canada Education Savings Grant ($500). Unfortunately, doing ONLY that is usually not enough to cover post secondary education.
Let's step back and review RESP basics. Slide, please!
Sidebar: Important to note that there is a lifetime maximum contribution of $50,000 per child. This is something that most people don't take full advantage of, or even know about.
Philosophical differences in how RESPs ought to be considered in a child's overall education funding plan. For example, will they qualify for student loans? Will they be responsible for helping to fund their own post secondary education? Will the parent(s) or guardian(s) fully cover all education costs, no matter what? How much then, will be needed to fund that goal?
Most planners work on the assumptions provided by the client. So today, I'll use the assumption that education costs (tuition, room and board) will cost $20,000/year, with some inflation built in (approximately 4%), and that it will be needed for 4 years. All contributions will be made at the beginning of the year (annually), and we assume a 5% rate of return on the invested funds each year.
NOW... what are the 4 ways in which we can approach this problem? Let's review what I call The Standard, The Beginner, The Top Up and The Maximizer.
SCENARIO 1 - "The Standard" - I find this usually accompanies a 'no planning' or not thought out approach, often sold to RESP subscribers by financial institutions. A $2,500 annual contribution with 20% match, then stopping when it's maximized. This may be the only scenario affordable to some, so is not to be discounted! Total funds by age 17 - $76,499.
SCENARIO 2 - "The Top Up". In higher earning years later in life, there may be more disposible income to top up RESP savings to the lifetime maximum of $50,000 per child. Understanding the total available top up outside of regular matched RESP contributions is $14,000 is material to this scenario (contributions up to $36,000 gets you the full lifetime $7,200 Canada Education Savings Grant - so there is an additional $14,000 that could be contributed). Make this additional top-up after making all matched RESP contributions (to receive the full CESG grant) to ensure you get to the $50,000 lifetime limit. Total funds by age 17 - $93,516.
SCENARIO 3 - "The Beginner" . Same approach as scenario 2, but in reverse. If extra funds are available at the start of a child's life, say by gifts from family members, or other sources, putting the extra $14,000 in from day one will give the RESP a supercharged boost! This is because you have more years of compound, tax-sheltered growth to ensure the RESP account gets to nicer, healthier size!
Total funds by age 17 - $110,191.
SCENARIO 4 - "The Maximizer". Say 'screw you' to the importance given to the Canada Education Savings Grant by making the full $50,000 maximum contribution in year 1. You will forego $6,700 in grants in exchange for compound growth on a much larger asset from day 1!
Total funds by age 17 - $121,534.
1. In the first scenario, we are putting a total of $36,000 in total to get to $76,499 by age 17. This is an increase of $40,499 over 17 years. However, it falls short in funding even 2 years of post secondary education costs.
2. If we look at scenarios 2 vs. 3, the same total dollars go in - $50,000 - with a similar cadence, despite the timing of the lump sum contribution of $14,000. The difference in account size is $93,516 vs. $110,191 - so you are ahead of the game by $16,675 by TIMING your lump sum contribution earlier than later (makes sense!)?
3. If we compare scenario 4 to 2/3, again we have the same total dollars - $50,000 - but our last scenario produces an account size of $121,534 - an increase of $11,343 over scenario 3 and $28,018 over scenario 2! Again, the same total dollars go in - $50,000 - but it's all about giving the account EXTRA TIME to do it's thing.
The moral of the story?
If funding post secondary education is a financial priority for you, give pause to your strategy.
First of all, how much is important to you to contribute or grow the RESP to?
When looking at your total dollars and cents, what priority do you give education funding as compared to other goals (retirement savings, renovation fund, travel account, emergency fund, etc)? As always, there is usually only 'so much money' to go around.
What funds do you currently have available to allocate to your strategy? Could you try and increase your current savings?
Are you making contributions monthly, annually or ad hoc?
Are you taking advantage of the full $50,000 of RESP contribution room, or do you plan to?
Have you taken advantage of the CESG program, or have a plan to maximize any carryforward contribution room?
If you're feeling lost on what to do, schedule an hourly consultation using the link below and let us assist in creating an ideal RESP savings strategy for you!