TAX, RETIREMENT
& ESTATE PLANNING
SERVICES
TA X
M A N A G E D
S T R AT E G Y
1 8
RESP Savings Strategies – Lump Sum or Periodic?
It’s no secret that the cost of post-secondary education in Canada is on the rise.
And for that reason, you may be wondering about the best savings strategy when it comes to contributing to
a Registered Education Savings Plan (RESP) for a child.
An RESP is a tax-sheltered investment plan. Unlike a Registered Retirement Savings Plan (RRSP), the contributions
are not tax deductible, however, the investment growth compounds tax-free until withdrawn, and as well,
the contributions can be returned to you as the subscriber without tax consequences. The remainder goes to the
beneficiary (e.g. a child or grandchild) and is taxable to them as income when it’s withdrawn for a post-secondary
educational program. In other words, it’s only the growth and any government grants that would be taxable in
the hands of the beneficiary.
The lifetime contribution limit on all RESPs is $50,000 per beneficiary, which is in addition to the Canada Education
Savings Grant (CESG) limit of $7,200.1 The CESG is paid into an RESP at a rate of 20 per cent of your contributions,
up to an eligible annual maximum contribution limit of $2,500, of CESG or up to $500 per year in CESG funding.2
1
2
Certain provinces also provide provincial incentives and/or grants in addition to the federal CESG.
T he maximum annual CESG grant is $1,000 on a $5,000 contribution if the beneficiary has adequate carry-forward of grant room available. Depending on your net family income, you could receive
an extra 10 per cent or 20 per cent on the first $500 per beneficiary contributed for a child’s RESP each year.
CONSIDERATIONS
If you have $50,000 available to invest for a child’s
future education needs, it may at first seem like a
good idea to contribute this full amount into the plan
immediately, to take advantage of the tax-deferred
compounding available inside the RESP.
Keep in mind that contributing the lifetime limit in
the first year of a beneficiary’s life will result in the loss
of CESGs in subsequent years, since only $500 of the
CESG will be paid into the plan in the first year.
Therefore, a decision needs to be made whether the
tax benefits of having the funds in the RESP will
outweigh the grants that are subsequently lost.
The following example will demonstrate the differences
between contributing the full $50,000 to the RESP as a
lump sum in the beneficiary’s first year of life compared
to a strategy that combines a lower initial contribution
with subsequent annual deposits.
Let’s look at two options that are available:
OPTION 1 - $50,000 RESP DEPOSIT
Under this option, Joe and Wanda deposit the entire
$50,000 into an RESP in year one and receive the
$500 maximum CESG for that year only.
OPTION 2 - $16,500 RESP DEPOSIT WITH
SUBSEQUENT ANNUAL CONTRIBUTIONS
Under this option, Joe and Wanda deposit $16,500
into an RESP in year one, $2,500 in years 2 through
14 and $1,000 in year 15 in order to generate the
maximum CESG each year. These annual deposits
are funded by investing the remaining $33,500 in a
non-registered investment in year one and withdrawing
the annual RESP deposits from this investment.
Assumptions:
Annual rate of return
6%
Taxable portion of return (non-registered) 20%
HERE’S HOW IT WORKS
Joe and Wanda are looking at different ways to
contribute to their newborn grandson Gabriel’s RESP,
and at the same time maximize the total amount
available to him for his future post-secondary
education needs.
Tax rate on investment income (non-registered)
Option 1
Deposits
25%
Option 2
RESP
CESG
RESP
CESG
$50,000
$500
$16,500
$500
Year 2-14
-
-
$32,500
$6,500
Year 15
-
-
$1,000
$200
$50,000
$500
$50,000
$7,200
Year 1
Total
* For illustration purposes only.
What it looks like at year 18:
Option 1
Option 2
$144,144
$125,844
-
$29,816 3
$144,144
$155,661
IDEAL CANDIDATES
■■
RESP
Non-registered
investment
■■
Total
* For illustration purposes only.3 Assumes that any taxes on realized gains from withdrawals,
as well as potential annual income distributions are paid out of the investment annually.
Individuals with at least $50,000 looking
to contribute to a child’s post-secondary
education
Individuals who want to maximize
the total amount available from their
investments and CESG
TAKE ACTION
At the end of 18 years, Option 1 results in an ending
RESP value of $144,144. Since the full $50,000 was
contributed to the RESP, this results in a higher RESP
value compared to the $125,844 ending RESP value
in Option 2. However, Option 2 results in a higher
total investment value amount since the remaining
non-registered investment that funded the annual
RESP deposits equals $29,816 – for a total of $155,661.
And as shown above, this option also results in the
maximum lifetime CESG of $7,200 being received
over 18 years.
In the end Joe and Wanda decide that it is more
beneficial to receive the maximum grants outlined
in Option 2, as this will leave them with the highest
total investment value to fund Gabriel’s post-secondary
education needs.
■■
■■
Complete an Education Savings Plan
Application for mutual funds or segregated
funds from Manulife.
Speak to your advisor about an investment
strategy that works with your tolerance of risk
FOR MORE INFORMATION CONTACT YOUR ADVISOR OR VISIT MANULIFE.CA/INVESTMENTS
The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice
of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Any amount that is allocated to a segregated fund
is invested at the risk of the contractholder and may increase or decrease in value. Commissions, trailing commissions, management fees and expenses all may be associated
with mutual fund and segregated fund investments. Please read the prospectus of the mutual funds, or the information folder, contract and fund facts of the segregated funds,
before investing. Mutual funds and segregated funds are not guaranteed, their values change frequently and past performance may not be repeated. The Manufacturers Life
Insurance Company is the issuer of the Manulife Segregated Fund Education Savings Plan insurance contract and the guarantor of any guarantee provisions therein. Manulife,
the Block Design, the Four Cubes Design and Strong Reliable Trustworthy Forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it,
and by its affiliates under license.
MK2874E 01/2015