The true way of using RESP
For say your son is born between 2015-01-01 and 2015-12-31, and he will go to University at age 18. As a result, you have approximately 17-18 years of investment horizon. The life time contribution limit is $50,000 for each child.
The Canada Educational Savings Grant (CESG) is capped at $7,200 for the life time of the Child, and the distribution is capped at $500/year or 20% of contribution, whichever is less provided that you don’t qualify for Additional Canada Educational Savings Grant (ACESG). So, logically speaking, the optimum amount to contribute per year is $2,500.
Did you know that you can contribute $50,000 on day one? The tax free compounding machine will start from year 1. The earning is significantly higher than the $7,200 CESG.
Let’s do a demonstration:
From year 1 to year 14 you contribute $2,500 each. On year 15, you only put in $1,000. The total CESG you will receive is $7,200 (life time Max). The total amount you put in is $36,000. And we will use $36,000 as basis for comparison.
For say you are able to earn 10% annually from investing in RESP.
After 15 years of investing and annual contribution by you and the CESG, the total amount is around $102,870 in the end. However, if you put in $36,000 at the beginning, the total amount would net $150,380, assuming no CESG was given. The variance is much bigger than the $7,200 CESG.
If you extend the compounding duration to 35 years, the difference will be huge.