The Registered Education Savings Plan(RESP) was setup to encourage parents to save for their children’s post-secondary education through tax-sheltered contributions and additional government incentives.
And studies have shown that having an RESP is associated with high enrolments in post-secondary education programs.
This post looks at how much you should put in your children’s RESP to maximize its benefits. We’ll start with
- an overview of how RESP contribution limits work
- how much to contribute to an RESP to maximize the government grants; and
- some of the factors to consider
RESP Contribution Limit and Rules
The RESP contribution limit is a lifetime limit of $50,000 per RESP beneficiary. This limit applies across all the accounts opened for each RESP beneficiary.
Unlike TFSA and RRSP that have an annual limit, there are no annual limits for RESPs. However, the amount you contribute each year can affect how much grant you receive from the government.
Check this post for a detailed guide on RESP Contribution Limits and a summary of all the limits for the associated programs like CESG and CLB.
Government Grants for RESP Contributions
Contributions made to an RESP will grow tax-free until withdrawals are ready to be made. When that time comes, the child will likely be in a lower tax bracket and be able to minimize or completely avoid income taxes on the gains.
This is one of the biggest benefits of RESPs. But the government grants are perhaps a bigger incentive for contributing to RESPs.
Canada Education Savings Grants (CESG)
With CESG, you get a 20% match on the first $2,500 in contributions per year. That’s an automatic risk-free return of $500 on your RESP contributions.
If you couldn’t contribute in a year, you can carry forward the unused CESG grant and catchup – one year at a time. For example, if you didn’t contribute in 2020, you can contribute $5,000 in 2021 to get a total of $1,000 in CESG grant money.
Depending on your income, you may also qualify for additional CESG of up to 20% on the first $500 contribution. That works out to a maximum of $100 per year. Qualifying RESPs get this in addition to the basic CESG of 20% on the first $2,500.
In total, the lifetime maximum CESG (basic and additional) per beneficiary is $7,200.
Canada Learning Bond (CLB)
CLB is an income-tested RESP grant. Unlike CESG, only low-income families qualify for this benefit.
The lifetime limit is $2,000: $500 in the first year and $100 for every year the beneficiary remains eligible.
Also, contributions to an RESP account are not required to get the grant. Once you have an account, the money will be paid whether you contribute to it or not.
Related Post: Guide to Canada Learning Bond (CLB)
How much should I put in RESP Per Month?
So how much should you be putting in your children’s RESP each month?
You should put $208.33 per month or a total of $2,500 annually in an RESP to maximize the benefits of using RESPs to save your kids’ education.
However, with no annual limit, parents or other RESP subscribers have more freedom to decide on the right amount to invest monthly or annually. Meaning it is up to you if you want to contribute the entire $50,000 lifetime limit in the first year or spread it over time.
Of course, the earlier you start investing and saving for your kid’s education, the more time the money will have to grow and compound tax-free.
But even if you can afford it, should you deposit a bulk amount at once?
How much should I contribute to RESP to maximize the grants?
To receive the maximum annual CESG grant of $500 on your RESP contributions, you will have to contribute $2,500 each year. That works out to $208.33 each month for parents that contribute regularly.
But there’s nothing stopping you from putting the entire $2,500 in a single month.
A parent starting in the child’s first year will contribute $2,500 for 14 years to receive a total of $7,000 in CESG grants. And another $1,000 in the 15th year to get to the lifetime CESG limit of $7,200.
| Contribution Year | Annual Contribution | CESG (20%) |
|---|---|---|
| Years 1 to 14 | $2,500 x 14 = $35,000 | $7,000 |
| Year 15 | $1,000 | $200 |
| Total | $36,000 | $7,200 |
The balance of 14,000 to reach the lifetime RESP contribution limit of $50,000 can be contributed to the RESP in any of the years.
The table above assumes that the RESP does not qualify for additional CESG. If it does, then the lifetime CESG limit of $7,200 can be received earlier than 15 years.
Note that CESG accumulates till a child turns 17. So parents starting late will need to plan their contribution and double-up in some years to take advantage of the free money.
The summary is that: the right amount to put in an RESP depends on individual circumstances. We’ll cover some things to consider in the next section.
Factors to consider when deciding on how much to contribute to an RESP?
In deciding how much to contribute to an RESP, here are some considerations
Maximizing government grants
Ever been advised to contribute $208.33 per month to an RESP? It’s so that you can maximize the CESG money. But if you started late or want to catchup with missed grants, you could double the amount to $416.67 per month for a total of $5,000 in the year.
How much you can afford?
In other words, your income and how much is left after covering the major expenses like housing, transport and food. $208.33 per month may seem small, but unfortunately not everyone can afford it. The next best thing, though, is to contribute whatever you can afford. Even a $500 contribution per year is better than nothing.
When you started contributing
Just like any other financial goal, the earlier you start savings for your kid’s post-secondary education, the lower the periodic contribution will be. Saving $2,500 per year for a child that’s just 2 is commendable. But if you’re starting at 15, you could be looking at a big gap if there are no other sources to cover the education costs.
Other sources of funding
RESPs are not the only option to pay for college costs. Your kids can cover part of the cost from their earnings from summer jobs, get a student loan and you can even cover the costs from your own income.
Other financial goals
Saving for your kid’s education is important and commendable. But it should not be at the expense of other financial goals. Do you have enough saved for retirement? Have some rainy day or emergency funds? What of getting out of debts or credit cards?
These other financial goals are also important. So deciding on how much to put in your RESP monthly should not be considered in isolation.
Expected Education Cost
The total estimated cost for your kid’s education is another important factor when deciding on how much to put in your RESP monthly or annually.
This may be difficult to estimate but there are a number of calculators you can use online. With some assumptions about inflation, expected rate of returns, whether the child will be living on campus or not etc, you can get an idea of how much to contribute monthly to the RESP.
Best RESP Providers in Canada
There are several RESP providers to choose from depending on how much you want to invest, how often and whether you want to handle the investments yourself or not.
You can check here for the best RESP providers in Canada. Many of them will let you invest small amounts of money at a time.
If you want to a self-directed account, Questrade has the best offering. You can learn how to easily build a DIY model RESP portfolio here.
Related Post: Questrade RESP Review
Final Thoughts
So how much should you save in your RESP?
The bottom line is: contribute as much as you can each month according to what you can afford, while keeping an eye on the grants.
This could mean $208.33 per month for a total of $2,500 per year. It could also be lower or higher depending on your financial situation.
But don’t prioritize contributing to your kid’s RESP at the expense of your other financial goals. In a worst-case scenario, your kids can get student loans to fund their education, but you can’t do the same for your retirement.
You can also consider working with a fee-only financial planner to draw up a plan that considers all of your financial goals.
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