Four great reasons to invest in Registered Education Savings Plans (RESPs)
Registered Education Savings Plans (RESPs) remains the best way to save for your kid’s education. Past changes to RESPs at both the federal and the provincial level, make RESPs a more attractive option than ever for saving towards your children’s education. Here are four great reasons to invest in RESPs:
Previously, contributors would get the Canada Education Savings Grant (CESG), which is 20% for every dollar contributed up to a maximum of $2000 of contribution per year. Effective since 2007, the government increased the CESG to a maximum of $2500 per year of contribution per year. This means the government will contribute $500 of CESG based on a maximum $2500 contribution. In my case, I have four children which means I can contribute as much as $10,000 for all four kids and the government would put in $2000 for a total contribution of $12,000. The maximum CESG that each child can get in a lifetime is $7200. That means I can contribute the maximum ($2500) for fourteen and a half years to maximize the grant money from the government.
Related article: The Terminology of RESP plans
Catching up on previous years contributions
If you have not made contributions to the Registered Education Savings Plans in previous years, you are allowed to do some catch-up. The government allows you to contribute a maximum of $5000 per year per child and qualify for the CESG on the entire contribution. In other words, you can only catch up one year at a time.
For example, my youngest son Brandon was born in 2008. If I had not made RESP contributions for him in the past, I could contribute a total of $15,000 into the RESP for Brandon but I would only be eligible for $1000 of CESG. I would be better off contributing $5000 per year for the next 3 years and be eligible to get $3000 in CESGs for the same $15,000 contribution.
Related article: RESP carryforward rules
No annual maximum contribution
Although the maximum you can contribute to the RESP and still qualify for the CESG is $5000, you can contribute as much as $50,000 lump sum. However, in doing so, you waive your future CESGs. In other words, if I contributed $50,000 for my youngest son Brandon, I would get the $1000 CESG but that’s it. No future CESGs would be available. On one hand, I would get tax-deferred compounding for Jason for the next 20 years but I would lose $6200 of CESG from the government. I think I would opt to invest the $50,000 into a non-RRSP investment into tax-efficient investments and stream $5000 per year into the RESPs to get the CESG grant money.
Alberta Centennial Education Savings Plan (ACES)
For Alberta only, the government will contribute $500 into an RESP for children born or adopted by an Alberta resident beginning in 2005. The Alberta government will contribute an additional $100 for children when they turn 8, 11 and 14. In my case, I have three of the four kids that were born 2005 and later which means I qualify for $1000 from the Alberta government. Although my oldest, Robbie was born prior to 2005, he will still get the $100 when he turns 8, 11, and 14. All you have to do is open up an RESP and contribute something to the plan to qualify. These grant money and earnings is transferable among siblings.
So there you have four great reasons to start contributing to Registered Education Savings Plans. Anyone like grandparents, uncles, and aunts can contribute to a child’s RESP but remember these limits discuss are for each child. Make sure there is some communication with the parents if you want to contribute to the RESPs.
There’s a fifth reason – an RESP means it probably won’t cost you anything when your kids go to university.
If you plan a bit, those RESP savings can mean that when they do hit university, there’s no changes in your budget. We’ve found this in our life – no dramatic impact on our finances when they go to school. No huge university cost shock – the money’s already there.
The doubling up in contributions to make up for lost years is really worth your mention. Our bank did NOT tell this to us when we enrolled our kids. Fortunately, I read about it on a blog and was able to get in before year end to make the second contribution.
BC also has a training and education savings grant of $1,200. Although it was only announced last year, and there is no way to apply for it yet, you’ll be notified after August 2015 to apply. There’s no deposits necessary either, so in that way it’s like the Canada Learning Bond.