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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).

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 13 comments… add one }
  • Mike February 27, 2007, 8:42 am

    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.

  • gillian June 24, 2008, 6:45 pm

    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?

    • FT FrugalTrader June 24, 2008, 10:58 pm

      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?

  • Sonny December 2, 2008, 5:29 pm

    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.

  • Curious for KIDS October 6, 2009, 5:38 pm

    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?

  • FT FrugalTrader October 6, 2009, 5:54 pm

    TD e-Series provides a means to INDEX your investments for a relatively low fee. You can read more about it here:
    https://www.milliondollarjourney.com/the-resp-strategy.htm

  • Leif Jason December 18, 2009, 8:53 pm

    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?

  • FT FrugalTrader December 20, 2009, 10:20 pm

    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!

  • Leif Jason December 22, 2009, 7:28 pm

    Thanks, that rocks!

  • Tammy January 31, 2011, 10:59 pm

    When we recently had our second child our “banker” changed our RESP to a family RESP.
    Can each child not have their own RESP?

  • FT FrugalTrader January 31, 2011, 11:11 pm

    @Tammy, yes each child can have their own RESP, it’s up to you if you want to have a “family” rather than individual RESP. However, in both cases, each child will get their share of CESG.

  • Istvan February 10, 2012, 5:52 pm

    My tactic was trying to optimize keeping the money in the RESP for the shortest time. The goal was to get the CESG and run. The plan also assumed that when my first child got the first EAP, I will immediately take out all my principal and pay out my mortgage, that I paid at a slower pace because of the RESP…Unfortunately there one glitch: Having a larger family my first children might qualify for OSAP. Unfortunately OSAP asks you to include in your income RESP withdrawals, although not taxable. This results in a reduction of OSAP loans, and what is worse, in a reduction of non-repayable grants. This is in fact a TAX. It can reach 30-40 percent in some cases, vaporizing any benefit that RESP’s had.
    If your planned family income would qualify you for OSAP when your children go to school, be very careful. Take out very small amounts of EAP’s each year. Again it can result in huge reduction of OSAP benefits.
    One option would be take out everything in the last year of school at once. By that time the child accumulated enough education credits to not pay tax.

  • Istvan February 10, 2012, 5:58 pm

    This thread was started when TFSA’s were not yet available. At the time it made sense to try to use the RESP as a tax shelter. Given how hard and complicated is to take out the income money from an RESP, I think RESP’s should be optimized based on keeping your own money (see my previous post) in the RESP for the shortest possible time, but get the maximum CESG for each child. For most people making contributions to the RESP that do not attract CESG makes not too much sense. The less income is in the plan the faster you can get the CESG portion out from the plan and avoid repayment.

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