Your child is about to start high school. Where has the time gone? The thought suddenly hits you: Is it too late to start contributing to a registered education savings plan (RESP)? You have a good idea of what your pre-teen is interested in, and they’ll likely want to go to college or university once they’ve graduated from high school. So, how do you finance those dreams?
It’s only natural that you’d want to help pay for your kid’s postsecondary education. You might not have been able to contribute to an RESP, though, or maybe you’re behind on your contributions. Good news! It’s never too late to adjust your financial planning and incorporate this component.
As financial planner Angela Iermieri says, it’s best to start contributing to your child’s RESP when they’re young so you can save more and take full advantage of matching government grants. But parents shouldn't get discouraged if they start a little later. If your child is 12, for example, you'll still be able to save a fair amount for their education by accessing a 20% grant from the federal government and another 10% from the Quebec government.
So it’s not too late to open an RESP for my child?
No, not at all. To receive grants when your child turns 16 or 17, one of the following conditions must be met by the end of the calendar year in which they turn 15:
- At least $2,000 contributed to the child’s RESP (and hasn’t been withdrawn) OR
- At least $100 a year contributed to the RESP (and hasn’t been withdrawn) over the four years prior
If your child shows interest in pursuing postsecondary studies, you should start contributing as soon as they begin high school. And they don’t have to be planning to go to university—college or vocational school studies are also eligible for an RESP. Estimate the cost of your child's education will help you calculate how much to save in an RESP.
Contributions are eligible for grants until December 31 of the year the child turns 17.
How do I catch up on my contributions?
If you contribute $2,500 a year, you’ll receive the maximum yearly grant amount from the government. And to catch up on lost time, you can contribute an extra $2,500 a year to get grants for both the current year and for any previous years you didn’t make contributions. That means you get $5,000 a year; if they’re 12, that means you have 5 years to catch up.
How can I access unused grant amounts?
If you increase your contributions to $5,000 a year, you could get the maximum annual grant amount. Assuming you begin when your child starts high school, that’s $25,000, all of which will be eligible for grants.
You can contribute up to a lifetime maximum of $50,000 per beneficiary. However, a maximum contribution of $36,000 is required to reach the cumulative grant limit. The maximum lifetime amount for the federal grant is $7,200. You can access another $3,600 through the Quebec education savings incentive. Ontario doesn't currently have a provincial education savings program in place.
Are there any tax strategies I can use to maximize grants?
One really good tax strategy is to use the tax refund you get from contributing to your registered retirement savings plan (RRSP) to put in the RESP. Your tax savings will be based on your marginal tax rate and government RESP grants. By using this strategy, you maximize the money you get back from the government for your family’s benefit, and you won’t have to choose between the two.
Keep in mind that there’s a time limit on RESP grants, so you should maximize contributions during this period. If there’s any remaining principal invested (contributions) after your child has finished their postsecondary studies, you can use it for other things. You might even want to increase your RRSP contributions.
Since RESP contributions belong to you, the subscriber, you might decide to use them to fund your child’s education or put the money in your RRSP. This money you’ve set aside belongs to you, while the grants and investment income generated belong to your child who’s pursuing postsecondary studies.