If someone told you that you could make 20 per cent on your money, guaranteed, you might think it was a scam. Well, that’s what happens when you invest in a Registered Education Savings Plan (RESP). The government provides the Canada Education Savings Grant (CESG), which consists of 20 per cent of the annual contributions you make into the RESP, up to an annual maximum of $500 per child. The lifetime maximum grant is $7,200 per child.
We make sure every client with children/grandchildren knows about this government program. For every client that opens a RESP account with us, we map out a detailed contribution schedule for them to ensure they obtain the full $7,200 CESG.
Main Benefits
Receiving the CESG is one of the main benefits of RESP accounts, but not the only one. Another feature of this account is that both the contributions and grant money received can be invested for further growth, and the payment of tax on this growth is deferred until withdrawal, at which point it is taxed in the hands of the beneficiary. As most young students generally have a very low annual income, the taxes payable are usually very low (or even inexistent).
Length of deferral
If a parent or grandparent (the “subscriber”) opens a RESP when a child (the “beneficiary”) is born, and that same child begins their first year of university at age 18, then the funds will have the ability for compounding growth for 18 to 22 years. The maximum deferral of a RESP is 35 years, at which time the plan must be collapsed. The range of tax-deferred growth therefore is between 18 to 35 years, for those that contribute early on. That’s why it’s so important to start early. Don’t wait until your child is a teenager before contributing to a RESP, as you will lose the deferral and compounding benefits.
Optimal Strategy
Every year is important when it comes to contributing to a RESP. The optimal strategy we map out for young parents is to contribute $2,500 each year for the first fourteen years of their child’s life, and $1,000 when your child is 15. Doing the contributions early each year allows a greater amount of time for the value of the RESP to grow. If coming up with $2,500 as a lump sum is difficult, then we suggest setting up a Pre-Authorized Contribution (PAC) of $208.33 every month (assuming only one child). Automating this with your Portfolio Manager will help ensure you stick with the plan.
Scenario to obtain full CESG
To illustrate The Greenard Group’s RESP schedule, we have used Jack and Jill Jones who have three children: Jonathan, Jason, and Jillian. When Jonathan was born, Jack and Jill had mortgage obligations and could not dedicate funds to a RESP. In 2019, we explained to Jack and Jill that, if they have missed any previous years, the government allows parents to contribute up to $5,000 per child a year, and still receive $1,000 of CESG. We mapped out a plan that enabled them to catch up with the CESG within 4 years.
For every client that has an RESP with us, we prepare a summary of the contributions already made (Assisted Contributions), our proposed contributions (Contribution Proposal), CESG already received, and proposed CESG if the proposed contributions are made. The Jones family have three beneficiaries within one family plan, and we mapped out a schedule for them.
Subscriber Name: Jack and Jill Jones (parents)
Beneficiary: Jonathan Jones
Birthdate: 2015-05-18
Beneficiary: Jason Jones
Birthdate: 2019-07-18
Beneficiary: Jillian Jones
Birthdate: 2022-10-24
The schedule has the Jones family contributing in a way that maximizes the CESG. We encourage contributions in January every year because, the sooner the contribution is done, the sooner they will receive the CESG.
Additional Contributions
Parents that are looking for ways to income split with their minor children can also choose to put additional contributions of $18,000 above the planned contributions. Although the extra contributions may not attract the CESG, the funds are tax sheltered and can be invested for further growth. Ultimately the capital contributed can be pulled out tax free and the growth would be taxed in the hands of the lower income beneficiary.
The Greenard Group RESP Withdrawal Schedule
When our clients’ children are beginning post secondary school it is important to discuss how the funds will be taken out of the RESP. Similar to the above, we prepare The Greenard Group RESP Withdrawal Schedule that clearly maps out the proposed transactions.
Investing within the RESP
Now that we have mapped out the strategy of contributions, the next decision is on how to invest the money. RESP funds can be invested in a number of different ways depending on the financial institution you are dealing with. If you open a RESP at a bank or credit union, you’re likely investing primarily in mutual funds. If you open a RESP at a full-service investment firm, you could explore different, lower-cost options outside of mutual funds, especially once the account gets built up.
Investing in individual common shares can be a good option. We feel that the RESP can be a fantastic learning opportunity to teach children about finances and investing. Every year you can sit down with your kids and discuss what to do with the current contribution money. You can analyse companies and weigh the pros and cons of different investment choices. Over time, you can teach your kids how they can track the RESP investments.
Priority should be on funding the RESP
The initial priority should be on setting the savings discipline and obtaining all available CESG grant money possible. As the beneficiaries get closer to needing the money (i.e. going to University) then shifting some or all of the investments into something more conservative to reduce risk generally makes sense.
When it comes to RESP accounts, savings is the key component. As noted above we recommend annual contributions of $2,500 for 14 years ($500 CESG each year x 14 = $7,000) and a $1,000 contribution in the 15th year ($200 CESG). This contribution schedule enables the subscriber to claim and obtain the maximum $7,200 CESG from the government per beneficiary.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Senior Wealth Advisor with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 2250.389.2138. greenardgroup.com
