The Registered Education Savings Plan (RESP) has become the cornerstone vehicle for saving money for children and grandchildren's education.
The reality is simple. Saving for our children's future has become a priority and the government has made some changes to the RESP to make it more attractive for Canadians to self-fund education plans. The most important change in the RESP was the creation of the Canada Education Savings Grant (CESG) in 1998. The CESG is a program where the government will pay money directly into a beneficiary's RESP. It adds 20 percent to the first $2,000 in contributions made into an RESP on behalf of an eligible beneficiary each year. The problem is there are several other rules and stipulations surrounding the RESP and the CESG that Canadians should be aware of. Let's walk through the life of the Martin's who have a family of three children Jimmy (age 16), Johnnie (age 15) and Emma (age 11).
Introducing the Martin's
Rob and Rebecca Martin are busy people. They both work to provide financially for their children. They are an active family with the three kids involved in sports, music, clubs and other activities. Rob and Rebecca just received some money from an inheritance and this has motivated them to take charge of their financial situation and start planning for retirement. In doing so, they also stumbled across some information on the RESPs. This is perfect, since they wanted to use some of the money for their three kids. When it comes to RESPs and having children close to the age of 16, it was important to be aware of some special contribution rules for children turning 16 and 17.
Children turning 16 and 17
RESPs for beneficiaries aged 16 and 17 will be eligible only if at least one of the following conditions is met:
- a minimum of $2,000 of contributions has been made to, and not withdrawn from RESPs in respect of the beneficiary before the year in which the beneficiary attains 16 years of age; or
- a minimum of $100 in annual contributions has been made to, and not withdrawn from RESPs in respect of the beneficiary in at least any four years prior to the year in which the beneficiary attains 16 years of age. This means that you must start to save in RESPs for your child before the end of the calendar year in which they turn 15 years of age in order to be qualify for the grant.
What does this mean for the Martins?
Firstly, with respect to Jimmy who will turn 16 in December of this year, he will not be able to get any of the CESG because there were no contributions made before this year (the year in which he turns 16). Had the Martins made a $2000 contribution last year, then Jimmy would have qualified for the CESG this year and even next year.
For Johnnie, who is 15 this year, the parents can make a $2000 contribution this year and get the $400 CESG. In addition, there are rules that allow the Martin's to catch up on CESG money from previous years. The Martins can contribute another $2000 this year and catch up on the CESG (another $400) from last year. In fact, they can catch up on all the years up to 1998 but only one year at a time. Because they make this contribution in the year Johnnie turns 15, it allows the Martin's to make an RESP contribution next year when he turns 16 and also the following year when he turns 17. Essentially, this means they can make a total contribution of $4000 this year, $4000 next year and $4000 the following year. They will qualify for $2400 of the grant money over the next three years.
And then there's little Emma at the age of 11. Like Johnnie, she can qualify for the CESG this year and every year until the year in which she turns 18. In addition, Emma can also catch up on the previous years up to 1998 but she can only catch up one year at a time. In real terms, it means that the Martins can put in $4,000 in the RESP for Emma this year. This would take care of this year's $2000 contribution (2004) plus last year's $2000 contribution (2003). Next year (2005), they can contribute another $4000 – $2000 for the current year (2005) and $2000 to catch up on the year 2002. In fact, they can keep contributing $4000 per year until 2008 when they will have made up for past contributions up to 1998.
Are you confused? If so, get some help from a financial expert. The RESP is a very powerful education savings vehicle. I know our priority is to take advantage of any grants the government will give us when it comes to saving for ourChildren. Give them the gift of Education.