To maximize your savings and help to ensure your child has the funds they need when they go off to college or university, you’ll need to deposit yearly contributions—and do it before the ball drops on New Year’s Eve. An RESP can stay open for as long as 35 years, so why the urgency? You need to meet the RESP contribution deadline in order to receive the maximum amount of grant money from the government, which could be as much as $500 a year. Consider it a “holiday gift” for their future.
One of the best ways for you to save for your child’s higher education is to open and contribute to an RESP. That’s because the benefits are twofold. First, a government program called the Canada Education Savings Grant (CESG) will match 20% of the annual contributions, up to $500 in a given year, to a lifetime maximum of $7,200. Children from families considered to be low-income or middle-income can get an additional 10% or 20% of the first $500 contributed to their RESP. There’s also the Canada Learning Bond (CLB), which can provide up to another $2,000 to low-income families: $500 in the first year the child is eligible to receive it, and $100 per year until the child reaches age 15.
Second, your child’s RESP will grow tax-deferred. The gains that the investments make over time won’t be taxed until your child enrolls in a recognized post-secondary program and withdraws the funds, and as long as the money is used for their tuition, living and educational expenses.
That’s OK. The CESG gives you a chance to catch up on contributions in future years. This savings grant is available until the end of the calendar year that your child turns 17. But be aware that you can only catch up one year at a time, for a maximum grant of $1,000 in a given year. An Embark Education Savings Expert can help you calculate how much to contribute when you need to play catch-up, and how much you will receive from the government.
An RESP has a lifetime contribution limit of $50,000 per child. You can get up to $500 from the CESG in a given year—to get the full $500, the RESP contribution for the year must be at least $2,500. Contributing more than $2,500 in any year won’t get you a bigger grant, but it will give your savings more time to grow. To get the CESG maximum of $7,200, you’ll need to contribute $36,000 to the RESP.
It can be hard to free up $2,500, especially leading up to the holiday season. That’s why many families break down their yearly goal into a more manageable monthly savings target. Putting aside $208 each month feels a bit more manageable. To get you to that monthly goal without feeling as much of a pinch in your household budget—which for many families is tighter than ever these days—try these savings tips:
- Ask grandparents, other relatives and family friends to consider contributing in lieu of gifts for birthdays and holidays.
- If you’re able, re-route some or all of the monthly government child-tax benefit you receive into the RESP.
- When your child is old enough to start earning a bit of money (by babysitting, for example), encourage them to put some of that money into their RESP. (This is a great opportunity to teach them about compound growth.)
- Set up a monthly or biweekly pre-authorized contribution plan to help yourself save automatically.
To get a better idea of how your savings, combined with the CESG, could grow over the years, check out this savings calculator from Embark.
Just think: If $2,500 is put in an RESP each year for 14 years, plus another $1,000 in the 15th year, your child will be able to get the full $7,200 from the CESG. For example, if you opened an RESP today for a two-year-old and contributed $2,500 each year to receive the maximum annual CESG contribution of $500, your savings could grow to about $59,000 by 2039. (All calculation assumptions, including assuming an average rate of return of 3%, can be found on the Embark savings calculator.)