RESPs: What’s the best contribution strategy for my family?

As a physician, you’re aware of both the value and the cost of post-secondary education. A registered education savings plan, or RESP, can be a great way to help save for the cost of post-secondary education for a child or grandchild.

If you’re thinking about setting up an RESP, you might be wondering what the best strategy is to fund the account. In this article, we’ll walk you through two potential strategies to help you understand your options.

Choosing an RESP funding strategy: Comparing two options

Over time, an RESP will grow as a result of three factors:

• the dollars contributed by the plan “subscriber” — that is, the person who contributes to the account
• government grants to encourage participation in RESP accounts
• the investment growth on contributions and grants

Annual contributions to an RESP are eligible for the Canada Education Savings Grant, or CESG. The CESG match rate is 20% of your contributions to a yearly maximum of $500 and a lifetime maximum of $7,200.¹

Many physicians opt to fund an RESP with annual contributions to ensure they receive the lifetime maximum of $7,200 in grants. This means the account balance grows slowly over the child’s lifetime and is boosted by yearly CESG amounts.

Another option is to front-load RESP funding early in a child’s life so the funds have more time to grow until they’re needed for post-secondary education. Choosing this option, however, means you won’t get all of the available grants.

What are the pros and cons of each option? Is it best to contribute as much as possible early on to maximize investment growth? Or should you contribute smaller amounts steadily over time, to maximize the government grants available? Here are two real-world scenarios that show how these two strategies might differ.

Option 1: Fund the RESP slowly, over time — to maximize Canada Education Savings Grants

• In this first scenario, the RESP subscriber maximizes the lifetime CESG by contributing $2,000 per year for 18 years — from the year of the child’s birth to when they might be ready to attend post-secondary education — for a total of $36,000 in subscriber contributions.
• This scenario means the account will benefit from $400 in CESG amounts for 18 years, or $7,200 in total, which is the maximum CESG available for an RESP account.
• It also means the balance in the RESP account grows slowly as yearly contributions are made, the CESG is received and interest accumulates on both.

Option 2: Fully fund the RESP as early as possible — to maximize investment growth over time

• In the second scenario, the RESP subscriber contributes the same $36,000 in the first year of the child’s life. (Although the lifetime maximum contribution to an RESP is $50,000, this scenario assumes the same total contribution as the first scenario to make an apples-to-apples comparison.)
• This scenario has the benefit of maximizing the amount growing tax-deferred in the account, but it also means the account will receive only one CESG, totalling $500, in the year the funds are contributed.
• In this scenario, the account grows as the result of investment growth on the initial contribution and the single CESG received.

In both scenarios, we assume the funds earn a 4% investment return compounded annually. With these background factors in place, here’s how the two options compare:

Comparing strategies for funding an RESP

Finding the solution that works for you

In the scenarios we’ve provided, Option 2 — fully funding the RESP as early as possible — has nearly $10,000 more in the account ($9,932 to be exact) in Year 18. But Option 2 also means nearly $20,000 in investment income ($72,929 minus $53,342) stays in the RESP instead of going toward other financial goals.

When you’re deciding how to fund an RESP, the beneficiary’s education goals are certainly important.  However, you will frequently need to consider real-world factors beyond those we’ve outlined in our two scenarios. These include balancing your other financial goals, such as contributing to an RESP while also paying down a mortgage, ensuring you have the right insurance coverage in place, saving for longer-term goals such as retirement, and enjoying life along the way.

Yet another factor is the amount of investment risk you’d like to take in the RESP. While Option 2 produces a higher ending value, all those funds are exposed to investment risk over the account lifetime. In Option 1, in contrast, the government grants provide a 20% return on the subscriber’s contributions that is free of investment risk.

Also, not many physician households have a large lump sum to contribute to an RESP when a child is young. For incorporated physicians, even when significant savings are available, they would need to be withdrawn from the corporation to invest in an RESP, unless the household has another source of income. This means tax would be payable, reducing the amount available to contribute.

Finally, keep in mind an RESP is not the only way to finance a child’s post-secondary education. Other strategies such as corporate savings or an education trust can also play a role in your financial plans. 

If you’re wondering how to design a strategy that fits your needs and circumstances, an MD Advisor* can work with you to design a personalized approach to help ensure your goals are met.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

¹ There is an additional CESG available for lower-income households. The additional CESG provides up to $100, in addition to the regular CESG, for families with adjusted net income for 2021 of under $49,020 and up to $50 for families with adjusted net income between $49,020 and $98,040. Additional grants may also be available in some provinces to support the cost of post-secondary education.  

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.