If your client is interested in maximizing their RESP contributions, we have outlined a great strategy for them to consider.
Let’s begin with a little refresher on RESPs, which have two significant benefits. First, there is the availability of government grants; the government will match 20% of your client’s contributions up to $500 per year, to a lifetime limit of $7,200. The second benefit is the tax-deferred growth of the investments within that RESP. Although the income is taxable in the student’s hands when withdrawn, they are typically in a much lower tax bracket.
The contribution limit for an RESP is $50,000. In order to maximize the grant money your client receives, they will need to contribute a minimum of $2,500 per year (20% of which is $500) over the course of 14 years and then $1,000 in the last year in order to hit that $7,200 grant ceiling. With these minimum contributions, they would have contributed $36,000 over 15 years.
If their goal is to maximize their RESP, they have another $14,000 of contribution room and although there is no additional grant available with respect to this amount, it still benefits from the second RESP advantage: tax-deferred (commonly tax-free growth). In order to maximize that benefit, your client will need to put that “extra” $14,000 into the registered account from the very beginning.
Keeping all of this in mind, here is the strategy to share with your client in order for them to get the most from their RESP: in the year their child is born, they will need to make a large contribution of $16,500 – this is the $2,500 in order to get their grant plus the “extra” $14,000. They then contribute $2,500 to the plan each year until their child turns 14. The final year, they will only need to contribute $1,000. And there you have it; your client has successfully reached the $50,000 contribution limit, taken full advantage of the government grants available to them and maximized the time value growth of their “extra” contribution room.
Your client receives free money and tax-deferred compound growth and you continue to provide the valuable advice that they have come to trust and rely on. It’s a win-win!