Nothing bugs me more than people not taking advantage of free money. But people do it all the time. Many Canadians are not taking advantage of their company defined contribution pension plans (where companies will match a percentage of the employees contributions) and another place that this occurs is with RESPs.
What are RESPs?
RESPs – Registered Education Savings Plans – allow parents in Canada to contribute a certain amount of money every year to save for their child’s education and get a government match of 20% of the amount they contribute, up to $500 per year (so to get $500, a parent would need to contribute $2,500), with a life time maximum of $7,200. Many provinces also have their own additional grants as a way on encouraging parents to contribute.
Although unlike with RRSPs (Registered Retirement Saving’s Plans), the money you contribute is after-tax money and is not deductible. The interest and any earnings on the plan though are not taxable until it is taken out and the idea is that it will be taxed in your child’s hands when they are a low-income student.
Why you should start contributing ASAP
The cost of university tuition and fees has been outpacing inflation since 1998 and the cost of four years at university for a child born in 2012 is expected to be over $100,000 if the pace remains the same. Combine that with the Government of Canada saying that currently over 2/3rds of all jobs require some sort of post-secondary education, those who won’t have one will be at an even bigger disadvantage then they have been in the past. So in order to give your child the best start at adulthood, you would want them to be able to get a good job AND have as little debt as possible holding them back, right?
However, the main reason you want to start contributing as soon as possible is because you want time to be on your side:
1. You can get up to $500 per year – however, you can only make up for ONE year when you contribute. So if you don’t contribute for several years, that matching amount will be lost for good (though you can contribute every other year and make up for the year before). To ensure you get the maximum of $7,200 this means you need to be consistently contributing $2,500 per year for 14 years.
2. You may be too late. You can only receive the grants up until the year that your child turns 17 – however, there is also a rule that says if you haven’t contributed by age 15, you won’t get ANY grant money for ages 16 and 17.
3. It is an automatic 20% return on your investment – even if you just left the funds sitting in cash, an RESP will earn as much as a much higher risk investment without the risk. But invest all those funds into a low risk investment, like a mutual fund or even GICs, you will get an even higher return.
4. Its easier on your budget. Putting aside $100 or $200 every month from from birth to age 17 is much more doable for families than the $1,000 or $2,000 per month they would have to contribute to make up for it if they start contributing once their child hits their teens.
5. Compounding. Your child’s RESP will continue to accumulate in value even if you don’t contribute for a few years. For example, say you contributed $2,500 the year they were born but didn’t contribute anything else except the $100 per year that is required for the four years before your child turns 16, even at a conservative rate of return of 5% here is how much money you would have:
|Year||Starting Balance||Contribution||Grant||Rate of Return 5%||Total|
|1||$ 2,500||$ 500||$ 150||$ 3,150|
|2||$ 3,150||$ –||$ –||$ 158||$ 3,308|
|3||$ 3,308||$ –||$ –||$ 165||$ 3,473|
|4||$ 3,473||$ –||$ –||$ 174||$ 3,647|
|5||$ 3,647||$ –||$ –||$ 182||$ 3,829|
|6||$ 3,829||$ –||$ –||$ 191||$ 4,020|
|7||$ 4,020||$ –||$ –||$ 201||$ 4,221|
|8||$ 4,221||$ –||$ –||$ 211||$ 4,432|
|9||$ 4,432||$ –||$ –||$ 222||$ 4,654|
|10||$ 4,654||$ –||$ –||$ 233||$ 4,887|
|11||$ 4,887||$ –||$ –||$ 244||$ 5,131|
|12||$ 5,131||$ 100||$ 20||$ 263||$ 5,514|
|13||$ 5,514||$ 100||$ 20||$ 282||$ 5,915|
|14||$ 5,915||$ 100||$ 20||$ 302||$ 6,337|
|15||$ 6,337||$ 100||$ 20||$ 323||$ 6,780|
|16||$ 6,780||$ –||$ –||$ 339||$ 7,119|
|17||$ 7,119||$ –||$ –||$ 356||$ 7,475|
That’s right – just that initial contribution of $2,500 would lead to almost $7,500.
But now imagine that you DO max it out – THIS is how much money you would have for your child:
|Year||Starting Balance||Contribution||Grant||Rate of Return 5%||Total|
|1||0||$ 2,500||$ 500||$ 150||$ 3,150|
|2||$ 3,150||$ 2,500||$ 500||$ 308||$ 6,458|
|3||$ 6,458||$ 2,500||$ 500||$ 473||$ 9,930|
|4||$ 9,930||$ 2,500||$ 500||$ 647||$ 13,577|
|5||$ 13,577||$ 2,500||$ 500||$ 829||$ 17,406|
|6||$ 17,406||$ 2,500||$ 500||$ 1,020||$ 21,426|
|7||$ 21,426||$ 2,500||$ 500||$ 1,221||$ 25,647|
|8||$ 25,647||$ 2,500||$ 500||$ 1,432||$ 30,080|
|9||$ 30,080||$ 2,500||$ 500||$ 1,654||$ 34,734|
|10||$ 34,734||$ 2,500||$ 500||$ 1,887||$ 39,620|
|11||$ 39,620||$ 2,500||$ 500||$ 2,131||$ 44,751|
|12||$ 44,751||$ 2,500||$ 500||$ 2,388||$ 50,139|
|13||$ 50,139||$ 2,500||$ 500||$ 2,657||$ 55,796|
|14||$ 55,796||$ 2,500||$ 500||$ 2,940||$ 61,736|
|15||$ 61,736||$ 2,500||$ 500||$ 3,237||$ 67,972|
|16||$ 67,972||$ 2,500||$ 500||$ 3,549||$ 74,521|
|17||$ 74,521||$ 2,500||$ 500||$ 3,876||$ 81,397|
Why you don’t have any excuses to NOT contribute
If you are in Canada and you have a child that is less than five years old, you have NO excuse to not contribute to the RESP. This is because every child in Canada, no matter what household income they come from, is entitled to received $100 per month every month until they turn 6 years old in the form of the Universal Childcare Benefit.
So to FULLY take advantage of the government matching plan and get the full $500, you would only need to fork over an additional $108 per month. This is not a lot of money and I bet that most families would be able to find room in the budget to accommodate this. Lower your cable or phone package, hunt for cheaper insurance plans, shop at the discount grocery stores, buy the store brand diapers. Keep maximizing your RESP contributions at the forefront of your mind when making other budgetary decisions. If you need to finance a new car, if you are picking a model that makes it difficult to maximize your RESP contributions, you are picking a car that is too expensive.
But even if you really can’t afford to maximize the contributions every year, remember anything you contribute is better than nothing, especially earlier on.
Still struggling? How about asking grandparents and aunts and uncles to make a contribution to RESPs instead of buying pricey toys for birthdays and Christmas. Use any money your child received for baby showers, baptisms, bar mitzvah’s or other milestone events as contributions. This is what we do – my parents don’t buy my kids expensive presents – they make a contribution to their RESP every year instead and its helped us ensure that we get the full $500.
What if my child DOESN’T go to university?
First of all, the RESP money can be used for pretty much any post-secondary program. This includes universities, colleges and various post-secondary education programs outside of Canada as well. So there is a lot of choice.
But here are your options:
1. Leave the RESP open
The RESP can stay open for 36 years, which gives your child a chance to change their minds (trust me, the novelty of working as a bartender will wear off when they start serving people who are younger than them and that more money).
2. Change the beneficiary
You can also transfer funds to another RESP beneficiary (such as a sibling). If you have an individual plan, you may have the option of naming another beneficiary. If you have a family plan, you can use the earnings and certain federal and provincial grants to pay for the education of another child under the plan (certain fees may apply though – you need to discuss this with your RESP provider).
3. Transfer the money to your RRSP
You might be able to transfer up to $50,000 of earnings tax-free from the RESP to your RRSP under certain conditions.
4. Close the RESP
The contributions you made are yours to keep and you get them back. You do have to return the grant money from the government, however if the RESP has been open for 10 years and the beneficiary is at least 21 years old and not continuing post-secondary education, you can keep the investment earnings. Please note that a 20% fee and income tax will apply. If you have a group plan, you cannot get the earnings back as these are shared with the other plan members to increase their payments.
5. Transfer the money to a Registered Disability Savings Plan (RDSP)
It may be an option for you to transfer the RESP funds into an RDSP if the beneficiary of the RESP has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education.
So get saving – remember you have until December 31st to contribute to make the year count.