Top 3 best education savings strategies

Find out how to maximize your Registered Education Savings Plan (RESP) savings and take advantage of available grants to build a solid education fund.

1. Choosing an RESP and grants
2. Optimizing your RESP: 5 winning strategies
3. Multiplying grants thanks to family rollover

The RESP is the only savings vehicle in Canada that benefits from generous government grants of up to $12,800¹ per beneficiary. This money, available without additional effort, grows tax-free alongside your contributions until you withdraw it to finance your child’s education.

• TFSA :useful, but no grants. It also offers tax-sheltered income growth and tax-free withdrawals. However, the Tax-free Savings Account (TFSA) is at a disadvantage compared to the RESP, since it does not offer government assistance for education.
• RRSP :designed for retirement, not education. Its main advantage lies in immediate tax deductions. On the other hand, withdrawals from a registered retirement savings plan (RRSP) will be taxable. It offers little or no flexibility for your children’s education, which usually takes place while you still have employment income.

In fact, if you have to choose between education and retirement, it’s often best to tackle the earliest projects first, i.e. postpone your RRSP contributions to take advantage of RESP grants. When the money is disbursed, you can recover your capital and transfer it to your RRSP to catch up on unused contribution room, since this money belongs to you.

There are a number of ways to optimize your education savings while taking RESP rules into account:

• You can invest a maximum of $2,500 per year and $36,000 over your lifetime to receive maximum grants.
• You can recover unused grants from previous years by contributing an additional $2,500 per year.
• You cannot exceed the lifetime contribution limit of $50,000, or tax penalties will apply.

So how much should you invest, and when? Let’s say you’re Nathan’s dad, and you open an RESP for him as soon as he’s born. He’s the first baby of the year in your little Quebec town. Nathan is eligible for a minimum of 30% grants.

Now, let’s compare five optimization strategies to estimate how much his RESP could earn him by age 18.

Scenario A: Contribute $208/month for 14 years and 5 months

This strategy makes it possible to obtain maximum grants as quickly as possible by contributing $2,500 per year. In this scenario, you stop investing as soon as the $36,000 limit is reached, i.e. in May of the year the child turns 14.

Result: $67,307 accumulated, including $31,307 in earnings.⁵

Scenario B: Contribute $173/month for 18 years

This strategy allows you to spread contributions over the entire eligibility period, i.e. until December 31 of the year in which the beneficiary turns 17. You would normally reach the $36,000 limit in April of that year. The monthly effort is less, but the benefit is worthwhile.

Result: $64,457 accumulated, including $28,457 in earnings.⁵

Scenario C: Invest $36,000 all at once

What if you choose to invest the $36,000 limit all at once? In this example, only the first $2,500 will be eligible for grants, but the returns will make up for it thanks to the long-term investment horizon of this... rather hefty amount.

Result: $67,835 accumulated, including $31,835 in earnings.⁵

Scenario D: $12,500 + $2,500/year up to age 15

If you want to take advantage of the maximum grants while maximizing the RESP’s growth potential, you should consider the RESP contribution limit of $50,000. With an investment of $12,500 in the first year and annual contributions of $2,500 for up to 15 years, you get the benefits of both worlds, in a way.

Result: $91,224 accumulated, including $41,224 in earnings.⁵

Scenario E: Invest $50,000 all at once

In this example, you have a large windfall and decide to invest the $50,000 all at once, as soon as your child is born. Then you don’t touch it again until it’s disbursed. Once again, only the first $2,500 will be eligible for grants, but this strategy will still offer maximum long-term growth.

Result: $93,686 accumulated, including $43,686 in earnings.⁵

Obviously, there are as many possible scenarios as there are financial situations. You can choose to invest a large amount at birth, then continue with smaller contributions, or vice versa. The important thing is to contribute!

When the time comes to disburse these sums to pay for your child’s education, you can recover your capital. You can choose to leave it in the account and withdraw it gradually, as needed, for yourself or for your child at school.

However, you could also take a portion of this capital and reinvest it in the RESP of another child in the family. In this way, the same capital would collect grants twice for two beneficiaries, and so on. This is a great way to optimize grants for families with several children.

Transferring funds to another child

If a beneficiary does not use all their funds or does not pursue post-secondary education, you can transfer their balance of Education Assistance Payments (EAPs, made up of grants and returns) to another family member.⁷ This other family member must:

• be the brother or sister of the initial beneficiary;
• be under 21 years of age.

Otherwise, you will have to return the grants to the respective governments.

Personalize your savings strategy with Kaleido

By leveraging education savings and grants, you can turn every dollar invested into a powerful lever for education and your financial health. In this sense, the simplicity and flexibility of Kaleido’s IDEO+ individual RESPs will help you achieve your financial goals.

Financing a child’s education shouldn’t be a source of stress, but rather an opportunity to invest in their future. Talk to one of our scholarship plan representatives to establish the best strategy for your budget and family situation.