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The true way of using RESP

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[OP]
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Apr 21, 2012
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The true way of using RESP

If you have too much money that you have already maxed your TFSA and RRSP, consider RESP. I believe the maturity of RESP is 35 years. Imagine, 35 years of tax free compounding.

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.
19 replies
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Mar 24, 2008
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Uranium101 wrote:
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.
...
What if you have a daughter? Same recommendation? :lol:
[OP]
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Apr 21, 2012
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ksgill wrote: What if you have a daughter? Same recommendation? :lol:
no, daughters are worth much more.
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Apr 20, 2011
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Remember a few weeks ago when people were fighting about kids moving out or not after age 20 in the mooching thread? And then there's the RESP. I doubt the crew that thinks living at home is so nasty realize how many Canadians actually do help their kids with things.
Sr. Member
Feb 8, 2015
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Kanata
Uranium101 wrote: If you have too much money that you have already maxed your TFSA and RRSP, consider RESP. I believe the maturity of RESP is 35 years. Imagine, 35 years of tax free compounding.

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.


You are assuming that the $50,000 you contribute on day 1 would be otherwise sitting in a savings account earning 1% interest.

Therefore, it makes much better sense to contribute enough to take advantage of the government grant and if you happen to have enough leftover, you top up your own TFSA and RRSP (I assume 99% of Canadian have not maxed out both)
Penalty Box
Dec 26, 2013
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good post, in my case the extra grant money equals $21600, that's a huge amount of money when talking government grants, plus what this amounts to compounded over the 18-22 years of growth, that wouldn't have been included in any other vehicle. For me its RESPs, then RRSPs, then TFSA's. Don't forget too there is very little accountability on what the withdrawals have to be spent on. I will no doubt be using all of it for my children, but another family that feels their children should pay their own way, (whole other thread), could still max out their RESPs, take advantage of the grants, in turn adding $22500 in principal that wouldn't otherwise of been there in an RRSP or TFSA.

http://www.moneysmartsblog.com/how-to-w ... your-resp/
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Aug 3, 2009
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I'd bet the $7200 CESG would increase in the future, right? University tuition fees seem to increase quite a bit every year, so I can only imagine kids in 20 years will be paying $15-20k a year for undergrad tuition so adjustments to the CESG seem necessary on that prediction, but who knows.
popbottle wrote: Remember a few weeks ago when people were fighting about kids moving out or not after age 20 in the mooching thread? And then there's the RESP. I doubt the crew that thinks living at home is so nasty realize how many Canadians actually do help their kids with things.
My education (graduated 2 years ago now) was paid for. However, a significant amount could have been saved using RESP and getting a gov't contribution. I recently learned my parents' financial adviser suggested against using it, for reasons unknown to me.

I don't subscribe to the mindset of leaving your kids to fend for themselves. Getting an education in the 60's and 70's is not comparable to what it costs today, so it is artificial for people to suggest Gen Y is on an equal playing field and thus undeserving of assistance.
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Sep 19, 2004
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Hmmm, so a parent with baby in 2015 has to find $$ to put in
say 20K in RRSP
10K in TFSA
then 50K in RESP

That's a lot of money to find :) but I totally get the idea
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jerryhung wrote: Hmmm, so a parent with baby in 2015 has to find $$ to put in
say 20K in RRSP
10K in TFSA
then 50K in RESP

That's a lot of money to find :) but I totally get the idea
20k in RRSP would mean you make $111k/year (unless you have contribution room saved up). 50k in RESP is over the span of 15 years, so your calculations come down to:

20k in RRSP
10k in TFSA
2.5K in RESP

on a 111k salary, doable?
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ksgill wrote: 20k in RRSP would mean you make $111k/year (unless you have contribution room saved up). 50k in RESP is over the span of 15 years, so your calculations come down to:

20k in RRSP
10k in TFSA
2.5K in RESP

on a 111k salary, doable?
Ha ha, I was just providing imaginary numbers. I thought OP was promoting dumping $50K at once to increase future value (Twins = 50K x 2? ouch)

For some, $100K salary should have enough savings. For some, it's not enough
It's just that we now have so many investment channels and priorities may get shuffled or become confusing
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Mar 24, 2008
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jerryhung wrote: Ha ha, I was just providing imaginary numbers. I thought OP was promoting dumping $50K at once to increase future value (Twins = 50K x 2? ouch)

For some, $100K salary should have enough savings. For some, it's not enough
It's just that we now have so many investment channels and priorities may get shuffled or become confusing
Dumping 50k/child all at once will only get you grant for that one year ($500).

If you contribute $2500/child/year, you get the whole grant ($7200). Some argue that if you front load the RESP with 50k, you will come out ahead as the investment has a longer time to compound. For me, I would rather take the guaranteed amounts vs betting that my investments will return 7% per year.
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May 19, 2006
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The government fiddled with the TFSA and I would bet money that there will be changes coming to the RESP as well especially with education costs increasing. Maybe in time for the next election!

Every parent should be doing this for their kids. It's a no-brainer and free money ... get something back for all the taxes you pay! :D
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Jun 20, 2011
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popbottle wrote: Remember a few weeks ago when people were fighting about kids moving out or not after age 20 in the mooching thread? And then there's the RESP. I doubt the crew that thinks living at home is so nasty realize how many Canadians actually do help their kids with things.
That thread made me laugh. Those people would freak out if they knew what I have in store for my current 4 year old. She won't know til later in life and after she learns the value of money though.
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DDHLeigh wrote: That thread made me laugh. Those people would freak out if they knew what I have in store for my current 4 year old. She won't know til later in life and after she learns the value of money though.
You took the words right out of my mouth. If you have the dough, and you taught them to spend wisely, go for it, ie: help them with university and so on.
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Nov 15, 2004
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Uranium101 wrote: If you have too much money that you have already maxed your TFSA and RRSP, consider RESP. I believe the maturity of RESP is 35 years. Imagine, 35 years of tax free compounding.

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.
So how do you plan to withdraw this money?

Your kid probably won't be in post-secondary at age 35, so when you withdraw you'll get your contributions back and then have to make an AIP withdrawal, which means you'll be hit with regular income taxes + the additional tax of 20%. You can mitigate some of that by transferring it to an RRSP, but I doubt you'd have the room to do so.
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What if you put 16.5k in the first year and then 2.5k each for another 13 years and finally 1k in the 15th year? That way, you'd max out the bonus AND have a compounding effect.
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Piro21 wrote: So how do you plan to withdraw this money?

Your kid probably won't be in post-secondary at age 35, so when you withdraw you'll get your contributions back and then have to make an AIP withdrawal, which means you'll be hit with regular income taxes + the additional tax of 20%. You can mitigate some of that by transferring it to an RRSP, but I doubt you'd have the room to do so.
Exactly.You can only roll it into a RRSP if you have the contribution room. And if it's not used yes you have to repay the grant money .You can also contribute money and get CESG from a previous year you didn't contribute.So the max contribution can be more than $2500 per year to get the max CESG if you have missing previous years contributions.I can't remember but I think the max CESG in a year is $1000


Sorry OP did you really think you found a great loophole the government didn't see?
[OP]
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Apr 21, 2012
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yyz64 wrote: Exactly.You can only roll it into a RESP if you have the contribution room. And if it's not used yes you have to repay the grant money .You can also contribute money and get CESG from a previous year you didn't contribute.So the max contribution can be more than $2500 per year to get the max CESG if you have missing previous years contributions.I can't remember but I think the max CESG in a year is $1000


Sorry OP did you really think you found a great loophole the government didn't see?
If we do the 50k at one time thingy, I assume we don't get a penny from the CESG. However, we do get $500 for one year, and that is all.

As for withdrawal.
- $50k can be withdrawal tax free upon the maturity date
- $500 CESG will be returned to the government at maturity date
- all others (earnings) will be taxed all at once unless you donate them to fund other people's education

Paying taxes all at once is much better than paying them each year.
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Dec 5, 2005
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Uranium101 wrote: If we do the 50k at one time thingy, I assume we don't get a penny from the CESG. However, we do get $500 for one year, and that is all.

As for withdrawal.
- $50k can be withdrawal tax free upon the maturity date
- $500 CESG will be returned to the government at maturity date
- all others (earnings) will be taxed all at once unless you donate them to fund other people's education

Paying taxes all at once is much better than paying them each year.
In a top tax bracket?Really
And I don't know if you can donate them which would really defeat your whole point wouldn't it?

Why wouldn't you just invest it in a non registered account and pay taxes at 50% of capital gains?Which you could do gradually not all at once.You haven't thought this through.
[OP]
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Apr 21, 2012
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yyz64 wrote: In a top tax bracket?Really
And I don't know if you can donate them which would really defeat your whole point wouldn't it?

Why wouldn't you just invest it in a non registered account and pay taxes at 50% of capital gains?Which you could do gradually not all at once.You haven't thought this through.
Well, it really depends on the tax rate.

You are right though, the end might not be as favourable as I have predicted.

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