RESP from Start to Spend

in RESP

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.

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.


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