Common RESP contributions have the extra advantage of dollar-cost averaging: investing equal quantities of cash at common intervals (say, as soon as a month) as a substitute of bigger lump sums much less typically (say, every year). This decreases market danger and smooths returns over time. Let’s run some numbers utilizing a simplified instance. In case you had been to contribute $2,500 yearly, you’ll attain the $7,200 CESG restrict within the RESP’s fifteenth yr. The $50,000 contribution restrict may very well be reached by making an even bigger contribution—$7,500—in yr 18. Assuming a 6% common fee of return, the ultimate RESP account steadiness could be $101,514: $50,000 from contributions, $7,200 from the CESG and $44,314 from funding revenue.
Liut’s tackle this method: “It is a nice possibility for many individuals who don’t have extra cash to contribute upfront however need to maximize the CESG. For many who have additional non-registered funds, nevertheless, I’m typically requested if a lump-sum contribution is the perfect method.”
Subsequent, we’ll discover utilizing a lump sum to front-load an RESP.
Choice 2: Entrance-load the utmost RESP contribution
Few households can have the power to contribute the utmost $50,000 in yr one, and this method additionally carries the chance of markets slumping quickly after investments are bought. Nevertheless, it’s value contemplating this feature to see the potential advantages of getting investments tax-sheltered early.
Contributing the utmost $50,000 in yr one would solely end in $500 of CESG. However, all that cash can develop tax-free for the total 18 years. For illustration functions, assuming a 6% common fee of return as in our first instance, front-loading with $50,000 would end in a last steadiness of $144,144: $50,000 from contributions, $500 from CESG and $93,644 from funding revenue.
So, we have now our reply, proper? Not so quick.
Disadvantages of front-loading an RESP with a big lump sum
Though front-loading seems to be a greater technique than possibility 1 due to the upper total return, right here’s why it’s not: It ignores the truth that if the $50,000 had not been used to fund the RESP, it might have been invested elsewhere. These funding returns, notably if they’re obtained inside a tax-sheltered account like a TFSA or RRSP, would negate the advantage of front-loading. To be helpful, any lump-sum contribution should come from funds out there after RRSPs and TFSAs have been maxed out.
“The advantage of lump-sum RESP contributions is basically to maneuver funds right into a tax-sheltered account as early as attainable,” says Liut. “So, it solely works if the opposite registered accounts are already being maximized.”