Optimizing RESP contributions
I was doing some reading on Tim Cestnick’s site today and came by a great article on optimizing RESP contributions that I thought I’d share with you. For those of you who don’t know who Tim Cestnick is, he is a one of the most renowned Canadian tax authorities in Canada. He’s written a few tax related books, and makes regular appearances on ROBTV. Tim has come up with a plan to optimize your RESP contributions.
..The goal is to accomplish three things simultaneously:
- (1) contribute the maximum $42,000 to the RESP,
- (2) receive the maximum $7,200 in CESGs, and
- (3) get the money into the RESP as quickly as possible to maximize the tax-free growth in the plan.
You can accomplish this by doing the following:
- Contribute $4,000 a year for the first three years of the child’s life ($12,000 in contributions)
- Contribute $2,000 a year up to and including the year in which the child reaches age 17 ($30,000 more in contributions, for a total of $42,000 in contributions). Not only will this maximize the contributions to the RESP, but it will net you the full $7,200 in CESGs (18 years of contributions at $400 in CESGs a year), and will get money into the RESP as quickly as possible.
Of course, this optimization technique is for those who plan on having children or have newborns and plan on maximizing the RESP strategy. In my article about RESP’s, I was leaning away from using RESP’s, but the readers here have convinced me otherwise (read here).
10 Comments, Comment or Ping
1. Mike
I’m a huge resp fan but putting that much $$ in might guarantee that you end up with too much in the account. That’s not the worst thing in the world but for those of us with mortgages etc I’d rather try to put the ‘right’ amount in.
Feb 27th, 2007 @ 8:42 am
2. gillian
I know nothing about investing. I opened individual RESP plans for my little ones (aged 5, twin 3 year olds, and 3 months – all boys:) through a family member at one of “those” RESP companies. I chose this because my principal is guaranteed – are any of these other ways to invest guaranteed?
Jun 24th, 2008 @ 6:45 pm
3. FrugalTrader
gillian, first congrats on the kids! Sounds like you have a busy schedule. :) With a self directed RESP account, there are no guarantees unless the money is placed into a guaranteed certificate (GIC). The problem with principle guarantees is that 18 years down the road, the original principle will be worth less due to inflation.
If you don’t me asking, what kind of fees do you have to pay for your RESP account? Are there any special terms and conditions?
Jun 24th, 2008 @ 10:58 pm
4. Me Contra
yes, there are ways to invest guaranteed without going through “those” companies…simply open a self-directed RESP and buy government bonds or a Fund that invests in the same from a reputable company (i.e. TD). It’s the same thing they do, but you save on a lot of fees and other headaches.
read more in my blog
http://mecontra.blogspot.com/2008/09/resp-issues-with-usc-resp-heritage-resp.html
Sep 19th, 2008 @ 5:32 pm
5. Sonny
Hi guys,
I’m new to all this about investments and RESP… but I was planning to open an account with Questrade and save for my newborn education via ETFs.
I’d like to ask for your comments for the following allocation:
20% XIU – Canadian Large Cap 60 Index Fund
15% XDV – Canadian Dividend Index
15% XSB – Canadian Short Bond Index Fund
25% XSP – US S&P 500 Index
25% XIN – MSCI EAFE Index Fund
Am I putting at risk the future of the baby??
Thanks in advance for letting me know your thoughts.
Dec 2nd, 2008 @ 5:29 pm
6. Curious for KIDS
Hi I have read all your posts regarding RESP’s.
I was wondering if you can comment why you you selected TD e-series, is there any other RESP investment option as good as e-series?
Oct 6th, 2009 @ 5:38 pm
7. FrugalTrader
TD e-Series provides a means to INDEX your investments for a relatively low fee. You can read more about it here:
http://www.milliondollarjourney.com/the-resp-strategy.htm
Oct 6th, 2009 @ 5:54 pm
8. Leif Jason
I’ve been doing some research into maximizing the RESP CESG and I am hoping for some clarity on unused grant room.
My older child was born in 2006, with no RESP contributions made until this year, 2009. We contributed $5000, enough to use the unused grant room from 2008, however what happens to the unused grant room from 2007 and 2006? If we contribute $5000 in 2010 and $5000 again in 2011, can we get ‘caught up’ on the unused grant room?
Dec 18th, 2009 @ 8:53 pm
9. FrugalTrader
Hey Leif, yes you are correct. However, you should note that in 2006 the maximum contribution was $2000, which can be carried forward. .
So basically carry forward:
2006: $2000
2007: $2500
2008:$2500
total: $7000
In any one year, you can receive a maximum CESG of $1000 or 20% of the contribution.
Thus so far, you’ve used $2500 of your carry forward, with $4500 left. Next year, if you contribute $5000, you’ve used another $2500, with $2000 carry forward remaining. In the following year, you can contribute $4500 and receive a CESG of $900. At which point, you are caught up.
Hope this helps!
Dec 20th, 2009 @ 10:20 pm
10. Leif Jason
Thanks, that rocks!
Dec 22nd, 2009 @ 7:28 pm
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