Unconventional ways of investing in a family RESP

Q. We have had a family RESP for many years with three beneficiaries: a son of mine from a previous marriage and two kids of our own. I have been the only subscriber for the RESP as it is my understanding that in order for there to be joint subscribers (that is, myself and my wife), all beneficiaries must have a blood relationship with all subscribers. That rules out my wife as a joint subscriber, as she obviously does not have a blood relationship with my son from my prior marriage.

 If my understanding above is correct, how does it work if I want to name a successor subscriber in my will? Can I name my wife, as she would then be the sole subscriber in the event of my passing? If not, who could I appoint?
–Bill

A. Bill, you’re good. Your wife can be a joint subscriber without literally being a “blood relative.” Here’s confirmation from the Government of Canada website, in sections 4(f) and (g).

Joint subscribers can be the parents, guardians; spouses or common-law spouses. 

With that cleared up, I need to ask: Have you given any thought as to RESP contribution strategies?

Most people aim to contribute $2,500 a year, in order to maximize the annual grant of $500, which is 20% of $2,500.  

Over the life of the RESP, the maximum grant per child is $7,200, requiring total contributions of $36,000. You can contribute up to $50,000 per child, if you like, but the additional $14,000 is not eligible for government grants.

The table below shows a few different contributing strategies and outcomes for a family with an income of $100,000 a year. In all cases, contributions stopped at a total of $36,000.

Now, let’s walk through these results. 

1. Waiting three years before contributing to an RESP (as in Scenario B) results in $10,666 less money.
2. An initial lump-sum deposit of $36,000, while earning a grant of only $1,000, provides the most money (Scenario C). 
3. Lump-sum investing may not be worthwhile once your child is older than 8 or 9 (Scenario D). 

You probably have questions. In Scenario C, for instance, why does a contribution of $36,000 result in only $1,000 worth of grant money?

The maximum grant paid in any year is $1,000 based on 20% of a $5,000 contribution. Of the $5,000 contribution, $2,500 is considered this year’s contribution and the other $2,500 is considered a past year’s contribution, if you have a past grant to catch up on.

You cannot collect all future grants with one lump sum payment.

However, in the example above making a $36,000 lump-sum contribution provided the most money because it was growing at a rate high enough to overcome the absence of guaranteed grants.

What happens if you contribute the lifetime RESP maximum as a lump sum?

The table below shows that with a 3% return on investments, the lump-sum approach is about equal to making regular annual contributions of $2,500, which would allow you to collect the maximum amount of government grant money.

We’ve established that you forgo government grant money by making a lump-sum RESP contribution, but can actually end up ahead through the growth of your investment over time. So, let’s look at how $50,000—the absolute lifetime maximum—in a lump sum would perform over time. I know for most young families this isn’t possible, given all the other competing demands for their money. However, I often see grandparents helping, or there may be an inheritance; and there are the lucky few with high incomes who have maximized their RRSPs and TFSAs, and are looking for another tax shelter.

Yes, an RESP is another tax shelter. The money grows tax-deferred and when it is withdrawn the growth and grants are taxed in the hands of your child, who will be at a lower tax rate than you.  Remember, not all RESP money has to be used for education (only grant money not used for post-secondary education must be returned to the government).

The table below shows a few different ways you could contribute $50,000 to a RESP. 

Again, the strategy of making an initial deposit of $50,000 and foregoing most of the grant money produces the best results when earning a 5% return (Scenario A). A cautious person may prefer to start with a lump sum of $16,500 (Scenario B) to capture all of the grants. 

The obvious thing is that if you are going to make a lump-sum deposit, the sooner the better.  This is no different than any other investing advice: the sooner you start, the more time your money will have to grow; and the bigger your initial deposit, the better.

Bill, I know I’ve deviated from your original question, but I find most people don’t give much to RESP contribution strategies and I thought you might find it interesting—and, hopefully, helpful as well. 

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected]

MORE FROM ASK MONEYSENSE:

• Should you sell your home to your kids?
• Is a personal injury settlement taxable, and can it impact OAS or GIS benefits?
• Planning for retirement with little or no savings to draw on
• What to consider when naming investment account beneficiaries