As the new school year approaches, it’s time to think about school supplies and your children’s educational future. Whether you’re a parent or a grandparent, one valuable financial tool to consider when investing in your children’s future is the Registered Education Savings Plan (RESP). This tool offers significant benefits to help you prepare for future education costs.
The Benefits of an RESP
The RESP provides two significant advantages. First, it allows you to benefit from federal and provincial government grants. For every dollar you contribute to the RESP, the federal government will add 20%, up to a maximum of $500 per year, with a lifetime limit of $7,200. In Quebec, there’s an additional provincial grant called the Quebec Education Savings Incentive (QESI), which adds 10% of your contributions annually, up to $250 per year, with a lifetime limit of $3,600. These combined government contributions offer a substantial financial boost to help you accumulate funds for your child’s education.
Secondly, the income generated by investments in the RESP grows tax-deferred. Only when the student withdraws these funds to pay for their education is the income taxed, often at a lower tax rate since students generally have little or no income while studying.
How to Maximize the Benefits of the RESP
To maximize the government grants, you should contribute $2,500 per year for 14 years, then add $1,000 in the final year. This will allow you to receive the maximum federal grant of $7,200 and the Quebec provincial grant of $3,600. This plan totals $36,000 in contributions over 15 years, but the contribution limit for an RESP is $50,000. This means you can contribute up to an additional $14,000.
Although these additional contributions are not eligible for government grants, they still benefit from the RESP’s tax-deferred growth advantage. To maximize the benefit, it’s recommended to contribute this “additional” $14,000 as early as possible in the plan, ideally in the first year.
Strategy to Maximize Your RESP
To maximize the potential of your RESP, an effective strategy is to contribute $16,500 in the year your child is born (i.e., $2,500 to obtain the maximum annual grants and $14,000 to maximize the tax advantage), then contribute $2,500 each year until your child turns 14. You would then add $1,000 in the final year. This strategy allows you to reach the $50,000 contribution limit, receive the maximum federal and Quebec government grants, and optimize the growth of your savings.
What If You Didn’t Start Contributing Right Away?
Life can get busy, and sometimes starting an RESP might not happen as soon as you’d planned. The good news is that it’s not too late to catch up on missed contributions and still maximize the benefits of the RESP.
Catching Up on Missed Contributions
If you didn’t start contributing to an RESP immediately, you can still recover previous years’ missed government grants. The federal government allows you to carry forward unused Canada Education Savings Grant (CESG) room. This means that in any given year, you can contribute more than the standard $2,500 to “catch up” on missed contributions from previous years.
You can contribute up to $5,000 annually to maximize the federal CESG. Doing so will give you the 20% grant on the current year’s and past year’s contributions, resulting in a $1,000 grant ($500 for each $2,500 contribution). You can continue this strategy each year until you’ve caught up on all missed contributions and maximized the grant.
In Quebec, the Quebec Education Savings Incentive (QESI) also allows some flexibility in catching up on missed contributions. The QESI will enable you to receive the 10% grant on up to $2,500 of contributions for a previous year and the current year’s contribution. Like the federal CESG, you can continue catching up on missed contributions in subsequent years.
The RESP is an excellent way for parents and grandparents to help young people build a solid future without being burdened by student debt. By planning now, you’re allowing your children to pursue their academic dreams with peace of mind.
So, as the new school year approaches, remember to add the RESP to your list of priorities. A small contribution today could make all the difference tomorrow.