Wondering if an RESP is your best bet for saving for your child’s future education? With the cost of education on the rise, it’s a smart question to ask.

New to RESPs? No problem! You can catch up on the basics by checking out last week’s article HERE. Once you’re up to speed, let’s dive into how you can make the most of your RESP.

So, how does an RESP stack up against other investment options? And what if your child decides not to pursue postsecondary education? We can’t predict the choices our children will make as adults, so how do we decide whether an RESP is the right investment choice? 

In this article, we’ll explore how to maximize your RESP earnings and what to do if your child opts out of college or university. We’ll also compare this with what would happen if you put the same amount of money into a non-registered investment account.

The calculations in this article apply to Individual and Family RESPs only. Group RESPs work differently, and we’ll cover them in a future article.

Okay, let’s get started!

Understanding the Canada Education Savings Grant (CESG) 

The CESG is a grant available to all RESP beneficiaries under the age of 17 (although special rules apply for children aged 16 and 17). It provides an additional 20% on the first $2,500 in contributions per beneficiary, per year. In other words, for every $2,500 you contribute you’ll receive $500 in grants, so long as you time your contributions correctly.  

For example: if you were to contribute $10,000 in a single year for one child you would only receive $500 in grants because that is the annual limit; but if you were to spread that contribution out over 4 years (ie: $2,500 per year), you would receive $2,000 in grants, on the same amount of contributions. Think you can find another investment that delivers consistent, guaranteed returns of 20% per year? Guess again. The CESG alone makes the RESP quite a powerful savings tool.  

The lifetime maximum CESG one can receive is $7,200. To reach the maximum you would need to contribute $2,500 per year for 14 years plus another $1,000 in year 15. You can also choose to contribute monthly, in which case the magic number you’re looking for is $208.33 per month to hit the $2,500 yearly maximum.  

Catching Up on Missed Contribution Years 

If you start an RESP a little later in your child’s life and you don’t have 15 years to reach that $7,200 maximum before your child turns 17,  there is still a chance for you to catch up on missed CESG years. RESPs include a provision that allows subscribers to “carry forward” unclaimed CESG entitlements, but you can only catch up on one year at a time.  

Example: Let’s say you open an RESP for your child on their 5th birthday. You contribute $2,500 when you open the account and receive $500 in CESG. The problem is, by waiting until your child’s 5th birthday to open the account, you only have 13 grant-eligible years left, and you need 15 to get the maximum CESG. The carry-forward provision means you are allowed to contribute an additional $2,500 per year for the next 5 years (so $5,000 per year total),and receive the CESG on the full amount ($5,000 x 20% = $1,000 per year). You would then be caught up on all missed contribution years by your child’s age 10, giving you plenty of time still to hit the CESG maximum.  

This catch-up provision also applies to family RESPs with multiple beneficiaries. You can contribute an additional $2,500 per missed year, per child and still receive the full grant. 

The Power of Compounding 

Not only do you get an instant 20% return from the CESG, but your contributions and grants can be invested (responsibly of course) to generate further returns.  

Let’s compare:  

First, if you make the maximum eligible contributions to your RESP it would take exactly 14.4 years to hit the $7,200 CESG lifetime maximum, so that is the number of years we will use for this comparison.  

Say you contribute $2,500 per year to a non-registered investment account that earns 5% annually. In 14.4 years you would have $53,494.96.  

If you were to contribute the same amount to your RESP, assuming it also earns 5% annually, after 14.4 years your account would be valued at $64,193.95, thanks to the CESG. The difference, $10,698.99, includes $7,200 from the grant plus $3,498.99 of additional investment income earned on the grant. 

Can RESPs Perform as Well as Other Investments?

Yes! In many cases you’ll be able to find investment options that are the same or at least similar to what you could invest in a TFSA or RRSP. How your RESP performs largely depends on how much volatility you’re comfortable weathering. 

Sidenote: Different types of investments are taxed differently, which will impact your net result. For the sake of simplicity I’ve omitted tax considerations from this comparison; however, it’s a factor you’ll want to consider in real life. In this example the RESP is still the better option, even when you factor in taxation.  

What If My Child Doesn’t Pursue Postsecondary Education? 

A common (and valid) concern among parents is what will happen to their RESP if their child chooses not to go to college or university. This is where things get a bit sticky, and why I think some parents hesitate to allocate resources to a plan that, on its face, seems inflexible. But let’s take a closer look:  

Continuing with our previous example, the $64,193.95 in your RESP can be broken down as follows:  

•  $36,000 in contributions 
•  $7,200 in grants 
•  $20,993.95 in investment income. 

 If your child says they’re not going to college or university you have two options:  

1. Leave the RESP intact in case your child changes their mind later, or; 
2. Wind up the RESP, in which case:
   1. Your $36,000 contribution will be returned to you tax-free. 
   2. The $7,200 in grants is forfeited back to the government. 
   3. The $20,993.95 in investment income will be taxable to you, the subscriber PLUS you’ll be charged a 20% penalty on this amount. This penalty is essentially the government claiming the right to those extra investment earnings you received on the grant. In theory this is reasonable however, in this case 20% of $20,993.95 is $4,198.79, and you might remember you only received an additional $3,498.99 in additional investment income.  

This means that when compared to investing somewhere other than an RESP, you’re out around 700 bucks.  

On the other hand, you could be out thousands if you decided to invest outside an RESP and missed out on all that free grant income and then your child decides to go to university so… you decide which scenario is more liveable for you.  

Provided you have the contribution room the government will also allow you to transfer your investment income to your RRSP, in which case you would defer the tax liability and avoid the 20% penalty altogether. This would make the RESP the more lucrative option because you get to keep the investment income earned on the grants.  

Even if you’re unsure about your child’s future educational path, RESPs can be a useful tool for building wealth. They offer unmatched financial growth with guaranteed returns, thanks to the CESG. Plus, the flexibility to transfer funds to your RRSP if plans change ensures you won’t lose out.

Yes, RESPs can be a bit more complex compared to other investment options, but don’t let that scare you off. If you have questions or need some guidance, chatting with your financial planner or advisor can help you navigate it all! If that’s me, just CLICK HERE to schedule a quick call to learn more!