Personal Finance

Contribute extra to RESP?

  • Last Updated:
  • Apr 28th, 2021 9:39 am
Tags:
[OP]
Member
Dec 26, 2019
375 posts
368 upvotes

Contribute extra to RESP?

Does it make sense to contribute more than the amount required to receive full government benefits to an RESP?

My thinking is that since I’m in a fairly high tax bracket, and my kids likely won’t be when they go to post-secondary, it’s a good way to get some growth at a low tax rate.

Note that all my other tax-advantaged accounts are maxed out.
18 replies
Deal Fanatic
User avatar
Jan 31, 2006
7295 posts
1880 upvotes
Toronto
Except for a few dollar interest, no advantage at all. Most people that open RESP put the max amount and get the max government benefits.
Deal Fanatic
Apr 5, 2016
5416 posts
3856 upvotes
Calgary/Vancouver
I would suggest open an in trust trading account for your child and invest in growth stocks/ETFs. Capital gains are taxed to the child so if planned correctly, can pay very little taxes. Make sure to "crystallize" (realize capital gains) every few years to maximize taxation planning.

This way, the child is also not limited to using the funds for education only. If he wants to travel the world, learn a trade not supported "authorized institutions", or do whatever, he can easily take the money to do so.
Deal Addict
Oct 4, 2009
2746 posts
1615 upvotes
Montreal
bomber17 wrote: This way, the child is also not limited to using the funds for education only. If he wants to travel the world, learn a trade not supported "authorized institutions", or do whatever, he can easily take the money to do so.
That strikes me as a bug, not a feature.Winking Face


OP, similar discussion currently happening in the investing forum. trust-accounts-minors-2460230/#p34384259
Sr. Member
Oct 14, 2012
706 posts
442 upvotes
Woodstock
Just making sure readers know that there is a lifetime maximum contribution per beneficiary of $50 000. Any contributions above that are subject to penalties.

https://www.canada.ca/en/employment-soc ... fo.html#h7

So as TripleQ says, some people contribute a lump sum one year of about $14 000 to max out the RESP to the $50 k, in addition to making smaller $2500 contributions annually to get the max matching grant.
Deal Addict
Nov 13, 2013
2874 posts
1557 upvotes
Ottawa
S5 wrote: That strikes me as a bug, not a feature.Winking Face


OP, similar discussion currently happening in the investing forum. trust-accounts-minors-2460230/#p34384259
No the money is yours. You can force your kid to work and spend it on your retirement. Well it's taxed in their name so you'd need to pay those taxes.

If everything else is maxed out I think it makes sense. I front loaded it to also reduce fees when starting the self directed account.
Deal Addict
Jan 2, 2015
2148 posts
1603 upvotes
NOT centre of Univer…
reversi wrote: Does it make sense to contribute more than the amount required to receive full government benefits to an RESP?

My thinking is that since I’m in a fairly high tax bracket, and my kids likely won’t be when they go to post-secondary, it’s a good way to get some growth at a low tax rate.

Note that all my other tax-advantaged accounts are maxed out.
If you have the money, all your TSFA and RRSP are maxed out, then you can contribute $14k more (without grants per kid), I say yes. Especially if you are sure they will go to post secondary. The growth is tax deferred until the child takes it out in their tax bracket. It's only on the grants and gains that tax is paid on. So if the amount is too much for them to spend, you can always take back the contribution. For us, we plan to give anything remaining as a gift for the kids to put in the TSFA to help them after they are done school.

As others have said, you can also do an in trust account, where the capital gains are in their tax bracket. There is more flexibility in what is done with the money, but that could also be a disadvantage too.
On a 'smart' device that isn't always so smart. So please forgive the autocorrects and typos. If it bothers you, then don't read my posts, but don't waste my time correcting me. If you can get past the typos, then my posts generally have some value.
[OP]
Member
Dec 26, 2019
375 posts
368 upvotes
Thanks all. I likely won’t complicate the situation with a Trust. But good to know that this is a strategy that once some people use with extra cash, up to the 50k limit.
Deal Guru
Dec 5, 2006
10243 posts
5329 upvotes
Markham
Macx2mommy wrote: If you have the money, all your TSFA and RRSP are maxed out, then you can contribute $14k more (without grants per kid), I say yes. Especially if you are sure they will go to post secondary. The growth is tax deferred until the child takes it out in their tax bracket. It's only on the grants and gains that tax is paid on. So if the amount is too much for them to spend, you can always take back the contribution. For us, we plan to give anything remaining as a gift for the kids to put in the TSFA to help them after they are done school.

As others have said, you can also do an in trust account, where the capital gains are in their tax bracket. There is more flexibility in what is done with the money, but that could also be a disadvantage too.
"For us, we plan to give anything remaining as a gift for the kids to put in the TSFA to help them after they are done school."

You mean put into their tfsa?
Jr. Member
Sep 28, 2011
128 posts
144 upvotes
reversi wrote: Does it make sense to contribute more than the amount required to receive full government benefits to an RESP?

My thinking is that since I’m in a fairly high tax bracket, and my kids likely won’t be when they go to post-secondary, it’s a good way to get some growth at a low tax rate.
Funny you posted this as I was just looking into this the other day. Based on what I've read, as long as you stay within the $50k contribution cap, there's no problem with it. While not huge, an $14k of tax sheltered growth per kid is better than nothing and when it comes time to take the money out, the odds of them being in my tax bracket as a student is pretty well zero. Not to mention who knows maybe they'll go on for a second degree and the extra money will come in handy.
Deal Addict
Jan 2, 2015
2148 posts
1603 upvotes
NOT centre of Univer…
smartie wrote: "For us, we plan to give anything remaining as a gift for the kids to put in the TSFA to help them after they are done school."

You mean put into their tfsa?
Yes, typos that are consistent.
On a 'smart' device that isn't always so smart. So please forgive the autocorrects and typos. If it bothers you, then don't read my posts, but don't waste my time correcting me. If you can get past the typos, then my posts generally have some value.
Deal Guru
Dec 5, 2006
10243 posts
5329 upvotes
Markham
Macx2mommy wrote: Yes, typos that are consistent.
How do you make sure they use money wisely since it's "their" money after put into their tfsa?

I don't mind helping my son . For example, if he wants to buy house , i can pay down payment or even more. But my fear giving them money directly is he will use it unwisely
Deal Addict
Jan 2, 2015
2148 posts
1603 upvotes
NOT centre of Univer…
smartie wrote: How do you make sure they use money wisely since it's "their" money after put into their tfsa?

I don't mind helping my son . For example, if he wants to buy house , i can pay down payment or even more. But my fear giving them money directly is he will use it unwisely
I can't guarantee or make sure my kids will use there money wisely. I can only hope that all the parenting that has led up to this will have provided enough guidance for them to use their money wisely. If you think your kid will use the money unwisely, then you only give them as much as you would not be resentful for if they do use it unwisely, and then teach them.

Remember that a gift is just that. If you want them to use money the way you want, you tell them. If you want them to learn and gain wisdom, then you have let them learn and make mistakes and teach them to think through choices. Just remember their choices may not be the same as yours and still be wise choices.
On a 'smart' device that isn't always so smart. So please forgive the autocorrects and typos. If it bothers you, then don't read my posts, but don't waste my time correcting me. If you can get past the typos, then my posts generally have some value.
Deal Addict
Feb 4, 2003
2609 posts
678 upvotes
Is there a way to find out how much have been contributed to an RESP account? I don't think the government track this like how they track TFSA?
[OP]
Member
Dec 26, 2019
375 posts
368 upvotes
zzricezz wrote: Is there a way to find out how much have been contributed to an RESP account? I don't think the government track this like how they track TFSA?
You’re right, we don’t get an annual update like we do with other taxable accounts. The government must track this somehow though, as they need to calculate / separately track:
- contributions
- grants
- capital gains

I moved my RESP from a mutual fund to Questrade last year, so my broker won’t have accurate information.
Deal Addict
Feb 4, 2003
2609 posts
678 upvotes
reversi wrote: You’re right, we don’t get an annual update like we do with other taxable accounts. The government must track this somehow though, as they need to calculate / separately track:
- contributions
- grants
- capital gains

I moved my RESP from a mutual fund to Questrade last year, so my broker won’t have accurate information.
just found our answer by googling :)

You can call Employment and Social Development Canada at 1 888 276-3624 to find out how much lifetime RESP contribution room remains for your child.
Deal Addict
Dec 4, 2016
1925 posts
944 upvotes
I read on some other Canadian personal finance forum that "front loading" makes sense if:

1. Your net income is above 90k, and you expect to have net income above 90k from now till RESP withdrawal.
2. You expect your investment to perform similar to TSX/S&P overall returns in the past 90 years.
3. You have maxed out all tax-advantaged account.

Personally, if I have 13k lying around in a non-registered account, I would dump that into RESP, assuming my RRSP/TFSA is maxed out and I'm in a reasonably high tax bracket.

Here's a debate on whether to "frontload":

https://www.financialwisdomforum.org/fo ... p?t=122118
Deal Addict
Jul 15, 2009
2335 posts
1491 upvotes
It's important to keep in mind that withdrawals of income from the RESP are not tax-free, just taxed at the rate of the student. It's almost certain that the student will be above above the basic personal amount and so paying some taxes. With 50k invested, the RESP is likely to have another 50k or more of income, especially since the government kicks in the first 7.2k of that. With a 4-year degree, that means withdrawing 12.5k a year, which gets you to the BPA. That's not to mention that most students have a summer job or a part-time job.

The lowest tax bracket is 20.5% plus another 5% clawback of the GST credit, so the student's METR is at least 25.5%.

Then add the fact that RESP withdrawals don't get the advantaged tax rate of capital gains or Canadian dividends. As a comparison, if the parent invested non-registered in something with no distributions and only a capital gain, they would come out ahead of the RESP as long as their marginal tax rate is below 51% because of the 50% inclusion rate for capital gains (25.5% / 0.5).

OK, so most investments are not only capital gains, they do pay some distributions. But then at least Canadian dividends are also tax advantaged.

In the end, maybe the rate on the RESP does come out ahead of the parent investing non-registered, but only slightly. But then there's the risk of the child not going to school. The surtaxes for that are huge. So: kid goes to school, you save a little bit of money (if any), kid doesn't go to school, you lose a lot. That's a big risk.

Then there's the flexibility. Non-registered, you sell whenever you want or need. RESP, you have to take it in those years that the child is in school.

Some will point to rumours about capital gains inclusion rate going up. Yes, that's a possibility. But there are also rumours of UBI. UBI would have to come with a high clawback rate or else people grossing six figures will still get some UBI and that's politically impossible. GIS clawback is 50% and if you look at the numbers, it's basically impossible for a UBI clawback rate to be much less than that unless you want CEOs getting UBI. So with UBI the student's METR suddenly becomes 75.5%.

RESPs make sense when you're getting the grant, but after that, it's a big risk.

Top