$16,500 lump sum, then $2,500 x 13 years + $1,000
Unconventional ways of investing in a family RESP
October 15, 2020
What happens if you contribute the lifetime RESP maximum as a lump sum?
The table below shows that with a 3% return on investments, the lump-sum approach is about equal to making regular annual contributions of $2,500, which would allow you to collect the maximum amount of government grant money.
| 2020 start | SCENARIO A
$2,500 x 14 years + $1,000 |
SCENARIO B
$36,000 initial deposit |
| Deposits | $36,000 | $36,000 |
| Growth (3% return) | $19,282 | $26,461 |
| Grant | $7,200 | $1,000 |
| 2038 total | $62,482 | $63,461 |
We’ve established that you forgo government grant money by making a lump-sum RESP contribution, but can actually end up ahead through the growth of your investment over time. So, let’s look at how $50,000—the absolute lifetime maximum—in a lump sum would perform over time. I know for most young families this isn’t possible, given all the other competing demands for their money. However, I often see grandparents helping, or there may be an inheritance; and there are the lucky few with high incomes who have maximized their RRSPs and TFSAs, and are looking for another tax shelter.
Yes, an RESP is another tax shelter. The money grows tax-deferred and when it is withdrawn the growth and grants are taxed in the hands of your child, who will be at a lower tax rate than you. Remember, not all RESP money has to be used for education (only grant money not used for post-secondary education must be returned to the government).
The table below shows a few different ways you could contribute $50,000 to a RESP.
| 2020 start | SCENARIO A
$50,000 lump sum |
SCENARIO B
|
SCENARIO C
$2,500 x 14 years, then $15,000 lump sum |
SCENARIO D
$2,500 x 10 years, then $15,000 lump sum + $2,500 x 4 years |
| Deposits | $50,000 | $50,000 | $50,000 | $50,000 |
| Growth (5% return) | $73,272 | $57,528 | $40,721 | $45,286 |
| Grant | $1,000 | $7,200 | $7,200 | $7,200 |
| 2038 Total | $124,272 | $114,728 | $97,921 | $102,486 |
Again, the strategy of making an initial deposit of $50,000 and foregoing most of the grant money produces the best results when earning a 5% return (Scenario A). A cautious person may prefer to start with a lump sum of $16,500 (Scenario B) to capture all of the grants.
The obvious thing is that if you are going to make a lump-sum deposit, the sooner the better. This is no different than any other investing advice: the sooner you start, the more time your money will have to grow; and the bigger your initial deposit, the better.
Bill, I know I’ve deviated from your original question, but I find most people don’t give much to RESP contribution strategies and I thought you might find it interesting—and, hopefully, helpful as well.
Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected]
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.