Save for Your Child’s Future: A Guide to RESPs
In order to maximize your savings and ensure that your child has the means they need when it comes to college or university, it’s essential to make annual contributions to a Registered Education Savings Plan (RESP) before the end of each year. A RESP can remain open for up to 35 years, but there’s a sense of urgency to contribute annually to receive the maximum amount of government grants, which can be up to $500 per year. Think of it as a “vacation gift” for your child’s future.
Why Contribute to a RESP?
One of the best ways to save for your child’s university education is to open and contribute to a RESP. The benefits are twofold. Firstly, the government’s Canada Education Savings Grant (CESG) matches 20% of your annual contributions, up to $500 per year, with a lifetime maximum of $7,200. Children from low-income or middle-income families may also receive an additional 10% or 20% of the first $500. Additionally, the Canada Learning Bond (CLB) provides up to $2,000 for low-income families: $500 in the first year and $100 per year until the child turns 15.
Secondly, your child will only be taxed on the earnings when they withdraw the funds to attend a recognized post-secondary program, and as long as the money is used for tuition, living, and education expenses, the tax implications will be minimal.
What if You Don’t Contribute $2,500 This Year?
That’s okay. The CESG allows you to catch up on contributions in future years. This savings subsidy is available until the end of the calendar year in which your child turns 17. However, note that you can only catch up for one year at a time. A savings expert can help you calculate how much you need to contribute to catch up and how much you’ll receive from the government.
What is the Maximum Contribution?
A RESP has a lifetime contribution limit of $50,000 per child. In a given year, you can receive up to $500 from the CESG, which requires a minimum contribution of $2,500. If you contribute more than $2,500 in one year, you won’t receive a larger grant, but your savings will have more time to grow. To receive the maximum CESG of $7,200, you’ll need to contribute $36,000 over the years.
Make a Plan for Your RESP
It can be challenging to free up $2,500, especially during the holiday season. To make it more manageable, many families break their annual contribution into a monthly savings goal. Here are some tips to help you reach your monthly goal without breaking the bank:
- Ask grandparents, relatives, and family friends to contribute to your child’s RESP instead of giving gifts for birthdays and holidays.
- If possible, put some or all of your monthly child tax benefits into the RESP.
- Encourage your child to contribute some of their earnings (e.g., from babysitting) to the RESP, teaching them about compound growth.
- Set up a monthly or bi-weekly pre-authorized contribution plan to save automatically.
A Brighter Future Ahead
Consider this: if you contribute $2,500 per year for 14 years and an additional $1,000 in the 15th year, your child can receive the full $7,200 from the CESG. For example, if you open a RESP today and contribute $2,500 for the maximum annual CESG contribution of $500, your savings could grow to around $59,000 by 2039.
Conclusion
In conclusion, contributing to a RESP is a smart way to save for your child’s education. By understanding the benefits, contribution limits, and catch-up options, you can create a plan that works for your family. Start today, and give your child the gift of a brighter future. With a little planning and discipline, you can help your child achieve their academic goals and set them up for success in life.