I wrote the following scenario as a simple example to show how RESPs can work, and include some advice from my experiences having used the program. Taking money out is really important so RESP from start to spend should be in your thoughts.
Registered Education Savings Plan (RESP)
So, now you have had a baby, and you are sure that your child will be a Doctor one day, or an Engineer, or maybe a Plumber? If you are thinking this, and you want to help them meet this goal, by helping financially, you might want to start working on saving money, and luckily (in Canada) the Government is kind enough to have set up the Registered Education Savings Plan (RESP).
What is your first step? Get your child a Social Insurance Number (the day after they are born, would be a useful time to apply, given how busy you will be in the days after that). Get that done, right away, or you will have to start waiting, and time is your friend at the beginning of this process, but don’t procrastinate, you are wasting valuable doubling time, if you do.
Next step, go set up an RESP with whomever you feel comfortable dealing with, or whomever gives you the best deal (Shop Around, don’t just use your bank because it is convenient). Check the RESP page for my experiences, and I would recommend try to stay away from Bank Mutual Fund accounts, give yourself enough freedom to use some simple Couch Potato Portfolios to invest your funds (remembering you have a relatively short period, and shouldn’t be too risky either, as you don’t have a lot of recovery time in your investment plan).
Now we have reached the part where you make your money start working. I am assuming that currently your family income is over $87,123 and that you can invest somewhere that will give you an average of about 4% growth per year. The big assumption is that you contribute the current maximum every year to the RESP $2500. What does this look like? Funny you should ask, I have a table right here for you:
| Year | Principal | Contribution | CESG | Growth | Year End Total |
| 1 | $0.00 | $2,500.00 | $500.00 | $0.00 | $3,000.00 |
| 2 | $3,000.00 | $2,500.00 | $500.00 | $120.00 | $6,120.00 |
| 3 | $6,120.00 | $2,500.00 | $500.00 | $244.80 | $9,364.80 |
| 4 | $9,364.80 | $2,500.00 | $500.00 | $374.59 | $12,739.39 |
| 5 | $12,739.39 | $2,500.00 | $500.00 | $509.58 | $16,248.97 |
| 6 | $16,248.97 | $2,500.00 | $500.00 | $649.96 | $19,898.93 |
| 7 | $19,898.93 | $2,500.00 | $500.00 | $795.96 | $23,694.88 |
| 8 | $23,694.88 | $2,500.00 | $500.00 | $947.80 | $27,642.68 |
| 9 | $27,642.68 | $2,500.00 | $500.00 | $1,105.71 | $31,748.39 |
| 10 | $31,748.39 | $2,500.00 | $500.00 | $1,269.94 | $36,018.32 |
| 11 | $36,018.32 | $2,500.00 | $500.00 | $1,440.73 | $40,459.05 |
| 12 | $40,459.05 | $2,500.00 | $500.00 | $1,618.36 | $45,077.42 |
| 13 | $45,077.42 | $2,500.00 | $500.00 | $1,803.10 | $49,880.51 |
| 14 | $49,880.51 | $2,500.00 | $500.00 | $1,995.22 | $54,875.73 |
| 15 | $54,875.73 | $2,500.00 | $200.00 | $2,195.03 | $59,770.76 |
| 16 | $59,770.76 | $2,500.00 | $0.00 | $2,390.83 | $64,661.59 |
| 17 | $64,661.59 | $2,500.00 | $0.00 | $2,586.46 | $69,748.06 |
| 18 | $69,748.06 | $2,500.00 | $0.00 | $2,789.92 | $75,037.98 |
| Totals | $45,000.00 | $7,200.00 | $22,837.98 | ||
| Assuming 4% Growth | |||||
| Assuming family income over $87,123 | |||||
Amazing watching money grow like that isn’t it? Did you look closely at the table? Did you notice that the current CESG max for you is $7200, so once you reach that maximum, you won’t get any more CESG kick ins (for now, given time, all these max values for contributing and CESG may change). Also remember that once your child turns 18, you would get no more CESG kick in either.
Remember that the Growth and CESG funds, will be taxed, in your child’s name, (from the example $7200 + $22838) so figure out how you wish to extract money from the account once your child goes to Trade School, University, College or any of the other Ministry Approved post secondary programs, to minimize any tax impacts on your child. This can get tricky if your child is lucky enough to work in a CO-OP Program.
You should also realize, that if your child leaves home, this will only really cover tuition and fees.
The SIN process is simpler now with an integrated application. https://www.canada.ca/en/employment-social-development/programs/sin/newborns.html
I am surprised that you have not included with your calculations the impact of the Management Expense Ratio (M.E.R.) that is taken regardless of growth on any mutual fund investment. Also the Rule of 40.
The MER is implied in the growth numbers and such, I have said previously to use Mutual Funds with low (below 1%) MERs such as the Vanguard ETFs or the TD E-series Index funds
If you are wondering what to invest in, in HIGHLY recommend buying strip bonds that mature during the years your child goes to school. This strategy is not talked about much, but it is a no brainer. You don’t have to worry about fluctuation, as you know exactly how much cash will be in the account and when.
I don’t know enough about strip bonds, but maybe it’s time to go read about them.
>I am not sure of the value of over contributing, except to have all the money in one place?
An early over contribution up to the maximum permitted of $14K can greatly increase the Growth over 18 years.
/paulc
Thought the Maximum match per year was $2500, thus any over payment you wouldn’t get the CESG.
We were unable to benefit fully from the program, since our kids were in their teens when it was introduced. One thing we did learn, however, which was not clearly explained and of which our advisor was unaware, was the fact that the funds had to be withdrawn while the recipient was still in school. Since we had the cash to pay the tuition up front (a requirement at the time), we decided to wait to withdraw the funds so as to allow the balance to grow. Fortunately, we did eventually close the account just before our son graduated.
Very good point, aim to close the account once the child is done school. Thanks!
Québec résidents get another 10% in governement grant, so for a $2500 contribution, you get an additionnal $250. Also, the maximum contribution is indeed $50,000, if you can afford it, you could put $7,500 the first year and $2500 each year after that. Finally, and it might be important for some people, if you divorce, remember that the principal is not in the kid’s name but count as your asset. So, that $50,000 (or more if you have more than one kid) might have to be split with your spouse if you divorce.
Yeh, the divorce question I have been curious about as well. There is a “beneficiary” named for the plan, but it is effectively owned by the parents.
Great post, isn’t the new limit $50k now? Would you recommend contributing more than $2500 each year?
Very true according to : http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/cntrbtns/lmts-eng.html
However, the government only matches up to 2500 per year for rich folks, so I am not sure of the value of over contributing, except to have all the money in one place?
Tawcan, Our daughter is young and we put in the $2500, but no more. If we wanted to save more, we have room in our TFSAs and they have less rules.
Great post, thank you!