Getting the Most from Your RESP
June 3, 2020
Interested in maximizing the impact of your RESP contributions? Here is a great strategy to consider.
First, a bit of a refresher on RESPs: the Registered Education Savings Plan has two significant benefits. First, the availability of federal government grants. The government will match 20% of your contributions up to $500 per year, to a lifetime limit of $7,200.* The second benefit is the tax-deferred growth of the investments within the RESP. Although the income is taxable in the student’s hands when withdrawn, they are typically in a much lower tax bracket.
The contribution limit for an RESP is $50,000. In order to maximize the grant money you receive, you’ll want to contribute a minimum of $2,500 per year (20% of which is $500) over 14 years and then $1,000 in the last year in order to hit the $7,200 grant ceiling. With these minimum contributions, you would have contributed $36,000 over 15 years.
If your goal is to maximize your RESP, you have another $14,000 of contribution room. Although there is no additional grant available with respect to this amount, it still benefits from the second RESP advantage: tax-deferred (commonly tax-free growth). In order to maximize that benefit, you’re best served by putting that “extra” $14,000 into the registered account from the very beginning.
When you put all of this together, the following strategy emerges as the best bet in order to get the most from your RESP: in the year your child is born, you make a large contribution of $16,500 (the $2,500 to get your grant plus the “extra” $14,000), and then plan to contribute $2,500 a year for every year until your child turns 14, with a $1,000 contribution in the final year. You will have reached the $50,000 contribution limit, maximized your receipt of government grants and maximized the time value growth of your “extra” contribution room.
Free money and tax-deferred compound growth? Yes, please!
*Some provinces offer additional incentives or grants. Please contact us to learn more.