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RESP - Front-loading to maximize your Child's RESP


Did you know that according to Statistics Canada, currently a four-year Canadian university degree can be expected to cost upwards of $60,000 and that sum could rise to more than $140,000 for a child born this year depending on the university. With an average student debt of $27,000 when Canadians finish university, the total average cost of post-secondary education is getting more expensive.

 

Opening a Registered Education Savings Plan (RESP) allows you to grow your savings for your child’s education with the help of bonuses and grants from the federal and provincial governments. The Canada Education Savings Grant (CESG) allows each beneficiary to receive 20% on the first $2,500 of annual contributions to their RESP, up to an annual maximum of $500 with a lifetime limit of $7,200. Meanwhile, the B.C. government will contribute an additional $1,200 for children ages 6 to 9 through the B.C. Training and Education Savings Grant (BCTESG).

 

Given that the lifetime contribution limit into a RESP is $50,000, there is $14,000 in potential contributions that are not eligible for an additional government grant. This is where front-loading contributions makes a lot of sense. Figure 3 illustrates this front-loading strategy and excludes the BCTESG since this grant only applies to British Columbians, and not all Canadians. By front-loading the contribution sum of $14,000 in the first year a child is born and keeping up with the annual contribution amount of $2,500 that generates the maximum $500 CESG allowable per year, three notable things have been achieved within fifteen years of a child’s life.

 

1)    The child has maximized their full CESG grant of $7,200.

 

2)     The $50,000 lifetime RESP contribution limit has been met.

 

3)     The RESP value has increased considerably more with the front-loaded $14,000 contribution in year 1.



Figure 3 – RESP Front-loading Strategy

Child's Birth Year

Front-Loaded Contribution Amount

Annual Contribution Amount

CESG Amount

Cumulative RESP Value*

1

$14,000

$2,500

$500

$17,000

2

$0

$2,500

$500

$20,000

3

$0

$2,500

$500

$23,000

4

$0

$2,500

$500

$26,000

5

$0

$2,500

$500

$29,000

6

$0

$2,500

$500

$32,000

7

$0

$2,500

$500

$35,000

8

$0

$2,500

$500

$38,000

9

$0

$2,500

$500

$41,000

10

$0

$2,500

$500

$44,000

11

$0

$2,500

$500

$47,000

12

$0

$2,500

$500

$50,000

13

$0

$2,500

$500

$53,000

14

$0

$2,500

$500

$56,000

15

$0

$1,000

$200

$57,200






Totals

$14,000

$36,000

$7,200

$57,200

 

 

 

 

 

* Cumulative RESP value represents contribution and CESG amounts only

 

As the great Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it”. Front-loading a RESP is phenomenal strategy to grow wealth for a child that helps to address the rising costs of education that is underutilized among Canadians. As Figure 4 demonstrates, the differential in RESP values is significant when incorporating this front-loading tactic combined with an investment strategy that makes use of compounded tax-sheltered growth in the long run.


Figure 7 – Compound Growth from RESP Front-Loading

RESP Front-Loading

RESP Starting Value

Time

6% Return

8% Return

10% Return

12% Return

Yes

$17,000

15 Years

$108,841

$133,679

$164,650

$203,233

No

$3,000

15 Years

$75,290

$89,269

$106,169

$126,604

If this strategy raises any questions, please feel free to reach out to anyone on our team.


-Creed Capital Management Team


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