How to Maximize Your RESP

With a fall breeze in the air and the children bumping off back to school, it's time to start thinking about Registered Education Savings Plans, or RESPs. These plans offer tax advantages for savings that are earmarked to fund a child's post-secondary education, and we find that they're often overlooked.

Here's what you need to know about how to maximize your RESP:

What does “How to Maximize Your RESP” mean?

"Maximizing your RESP" refers to the process of optimizing your Registered Education Savings Plan to get the most out of it. To do this, you can consider factors like contribution amounts, investment options, and government grants. By making informed decisions and regularly reviewing your RESP, you can help ensure that your child's education is well-funded.

RESP Rules

The RESP rules around contributions aren't particularly complicated, but they do produce some interesting results. In short:

• The RESP contribution limit is $50,000 per beneficiary,

• Every year that you contribute, you will receive a grant for 20% of your contribution,

• Grant money cannot exceed $500 in any one year, and $7,200 lifetime total.

There are some rules about making up contributions from previous years (allowed, other than in the last few years of the plan) but in today's email we will focus how to maximize the value of a family plan for a newborn.

The Three Ways to Invest in an RESP

Investing in an RESP isn't suitable for everyone. If a $2,500/yr contribution is going to be a stretch, it's probably best to keep that cash on hand for other uses. Beyond that, there are three basic RESP contribution plans: annual, lump sum, and some combination of the two. For a quick cheat sheet, here's a sensitivity analysis of each option.

*Until lifetime contribution limit is reached

Below, we'll dig into each option:

Making an Annual Contribution of $2,500

The most obvious way to contribute to an RESP, and the most common, is to contribute $2,500 a year. This achieves the maximum grant value of $500 and accumulates to a significant amount over 17-year life of the plan. If we assume a 5% rate of return, these $2,500 contributions add up to $79,973.

Source: Canaccord Genuity

For clients with the means to do so, this approach has a lot of value. Even assuming a modest rate of return, the difference in final value over the annual contribution plan is significant: a 44% difference in our example.

The Goldilocks Approach: A Sizeable Contribution in Year One, Followed By Annual Contributions

If you have some cash available, but aren't able to maximize your contribution in the first year, don't worry: there is still a lot of value available. For example, here's how making a $35,000 contribution in the first year and $2,500 for the six years after that adds up:

Source: Canaccord Genuity

The final value of this account ($116,267) is slightly higher than the single lump sum plan, since the return of 5% isn't enough to overwhelm the $500 grants earned in years 2-7. It's only once you start assuming double-digit returns that the difference between the $50,000 initial contribution and the $35,000 becomes really significant.

Maximizing your RESP is an important step in ensuring your child has the financial means to pursue higher education. There are a number of strategies you can employ to get the most out of your RESP, beyond just making regular contributions.

Start Early

One of the most effective ways to maximize your RESP is to start contributing early. By doing so, you give your contributions more time to grow through compound interest. Even if you can only afford to make small contributions in the early years, the long-term benefits of starting early can be significant.

Contribute Regularly

Another important factor in maximizing your RESP is to contribute regularly. Making consistent contributions ensures that you take advantage of the maximum government grant available each year, and it helps you stay on track with your savings goals. Even if you can only afford to contribute a small amount each month, it can add up over time.

Choose the Right Investment Options

Choosing the right investment options for your RESP is critical to maximizing its value. Your RESP can be invested in a variety of options, such as mutual funds, stocks, and bonds. Consider working with a financial advisor who can help you choose the right investment mix based on your risk tolerance and financial goals.

Take Advantage of Government Grants

One of the most attractive features of RESPs is the government grants that are available. Make sure you take advantage of these grants by contributing the maximum amount each year. Remember, the grant money cannot exceed $500 in any one year, and $7,200 lifetime total. So, if you haven't been contributing the maximum each year, it may be worth making a lump sum contribution to catch up.

Consider Family Plans

Family plans are a great way to maximize your RESP if you have more than one child. With a family plan, you can name multiple beneficiaries and allocate contributions to each child as needed. This allows you to take advantage of the government grants for each child, while still keeping your contributions manageable.

Review and Adjust Regularly

Finally, it's important to review and adjust your RESP regularly. Life circumstances can change, and your investment goals may shift over time. By reviewing your RESP on a regular basis, you can make sure it continues to align with your financial goals and make adjustments as needed.

Maximizing your RESP involves a combination of factors such as starting early, contributing regularly, choosing the right investment options, taking advantage of government grants, considering family plans, and reviewing and adjusting your plan regularly. By employing these strategies, you can help ensure that your child's post-secondary education is well-funded and set them up for a bright future.

How to Maximize your RESP

For most clients, we recommend the Goldilocks approach. At very high levels of portfolio performance, it falls short of contributing the maximum in year one, but the certainty of annual government grants is very attractive. The $500 grant on a $2,500 contribution is a return you can count on.

Since your child probably wasn't born yesterday, there's a significant amount of math that goes into maximizing the value of your RESP. That's why we built a maximizing calculator, that takes into account the relevant variables (child's age, RESP contribution room, etc) and produces a range of options for you to explore. If you would like to save for your child’s post-secondary education, contact our team and we will be happy to help.

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If you'd like to open an RESP, or to discuss an existing one, don't hesitate to reach out to us at 604.643.0101.

Cash Management Group

604.643.0101 | Email us

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