RESP from Start to Spend

I wrote the following scenario as a simple example to show how RESPs can work, and include some advice from my experiences having used used the program.

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.

 

{ 14 comments }

{ 14 comments… add one }
  • Derek December 6, 2014, 11:31 AM

    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.

    Reply
    • bigcajunman December 6, 2014, 12:10 PM

      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

      Reply
  • Andrew October 10, 2014, 10:08 AM

    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.

    Reply
    • bigcajunman October 10, 2014, 1:55 PM

      I don’t know enough about strip bonds, but maybe it’s time to go read about them.

      Reply
  • Paul Cotton October 10, 2014, 9:25 AM

    >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

    Reply
    • bigcajunman October 10, 2014, 1:57 PM

      Thought the Maximum match per year was $2500, thus any over payment you wouldn’t get the CESG.

      Reply
  • Lynn October 9, 2014, 2:53 PM

    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.

    Reply
    • bigcajunman October 9, 2014, 2:56 PM

      Very good point, aim to close the account once the child is done school. Thanks!

      Reply
  • Francois October 4, 2014, 9:47 PM

    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.

    Reply
    • bigcajunman October 5, 2014, 6:32 AM

      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.

      Reply
  • Tawcan October 3, 2014, 4:30 PM

    Great post, isn’t the new limit $50k now? Would you recommend contributing more than $2500 each year?

    Reply
  • Peter October 1, 2014, 8:10 PM

    Great post, thank you!

    Reply

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