Registered Education Savings Plan (RESP): Maxing it out before versus waiting for the match to have the highest returns
Note: This is clearly only if you have the money to be able to max it out at the start, but I am exploring the options of maxing out an RESP at the start of your child’s life versus waiting for each year to put in the $2500 and obtain the matching grants from the government.
What is an RESP?
Registered Education Savings Plan. Read more about it here.
What’s the RESP match?
For every $2500 you put into an RESP for a child, you get $250 from the Québec government and $500 from Canada, but the trick is that it is time sensitive. You have to put in $2500 each year, you can’t throw in the $50K at once and get the full contribution match for instance. You need to wait each calendar year to obtain this $750.
The thing is, time in the market is more important than timing the market.
But what about the free 20%!?
Yes, the Canadian government gives you $500 for your $2500, and the Québec government gives you $250 for that $2500.
For the $2500 you put in yearly, you get $750. I did consider this, and actually, for the first year, it is a solid 30% return on the first $2500, but when you consider the maximum lifetime contribution is $7500 from Canada, and $3600 from Québec, it is $10,100 in total on about $42,500 (it maxes out around the age of 16.5 or so):
- What can you use to save for your children – Registered Education Savings Plan
- How much should you contribute to your child’s RESP
- How much it will cost for Little Bun to go to university (Initial thoughts, they have shifted slightly since then, but not much)
- What else aside from the RESP can you use to save for your child in Canada?
So, taking all that into account, that’s about 23% of a “return” if you space out your money at $2500 a year.
Let’s take a look at the numbers:
Putting in $50K at Age 0
Total at age 18: $178,261
Contributed: $50,750 (for the first year you get that $750 match)
Now let’s look at the conventional approach most people talk about – $2500 a year:
Versus $50K on a gradual return:
Total at age 18: $116,116
Contributed: $60,100 ($50K + Canada and Québec at $10,100)
DIFFERENCE OF: $62,145
You can see that you have a solid $62,145 difference just from starting with a huge lump sum. For me, as I did not do this for the first 7 years, my numbers look more like this with $144,593 as his projected RESP portfolio at age 18. Not bad, but I missed out on about $34K, just from those first 7 years. Of course, this is all speculative, as I did not miss out on anything, this is still a significant amount of money to have for your education at 18. I do not feel bad!
I know it seems counterintuitive “but I get a 30% return on the money!!!”, but if you consider it overall, the growth doesn’t lie in terms of the numbers, but also, that 30% return is JUST on the $2500 contributed.
That 30% “free money” isn’t on your ENTIRE portfolio!!!
Remember – it isn’t on the 30% of your ENTIRE current portfolio, so if today, you have $30K in your RESP, you aren’t getting 30% on that $30K.
You’re getting 30% on the $2500, so it’s really more 2.5% of a return ($750 given divided by your total $30K portfolio = 2.5%).
And as you save more and more, the “30% return”, becomes less and less as an overall incentive.
So what to do?
If you have the cash, max out your RESP at $50K from the start and ignore the government match. If they ever decide they do not want to go to school, you have to give that money back anyway, if that’s any consolation.
If you do not have the cash on hand, PLEASE take advantage of the government contributions and put in what you can, to “max” it out at $2500. Either way, you are saving for their education (please though, NEVER at the expense of your retirement, I beg you), and you are doing a great job passing on generational wealth, and starting the ball rolling.
ANYTHING set aside from them is amazing. I had $0 when I went to school so I would have appreciated even $100. You’re doing great.