RESPs are great for families with kids and contributing early and often can have a huge impact on how you end up financing your child’s post-secondary education.
The rules surrounding RESP contributions are fairly simple and flexible.
The bottom line is that through the program, you can get 20 cents on the dollar in free cash through Canada Education Savings Grants (CESG) every year until your child turns 18.
With $7,200 in grants on the line, contributing to an RESP is a no-brainer.
RESP Contribution Limit
The maximum lifetime amount you can contribute to an RESP is $50,000.
There is no limit to how much you can contribute annually, however, the government’s CESG program will only match your first $2,500 in contributions annually.
Based on a 20% matching rate, you can get up to $500 per year in grant money. In total, Ottawa pays up to $7,200 in lifetime CESG grants per child.
Assuming you contribute the maximum $2,500 eligible for matching CESG money every year, you will have collected the maximum government grant of $7,200 by the time your child turns 15 years of age.
This works out as follows:
- $2,500 x 14 years: $35,000
- Contribute $1,000 in year 15 for a total of $36,000
- Total CESG received: ($500 x 14) + $200 in year 15 = Total of $7,200 in grants.
As you may have noted, the total contribution required to max-out government grants is much less than the maximum $50,000 amount you can contribute per child per lifetime.
Essentially, this means you can actually contribute more than $2,500 per year, even if you won’t receive matching grants on the excess amount.
Low-income families may qualify for additional CESG and the Canada Learning Bond.
Note that grants are not included in the lifetime $50,000 contribution limit.
Related: The Best Bank Accounts for Kids
RESP Contribution Limit Catch-Up
You can carry forward CESG-eligible contributions to the following year up to a maximum of $2,500.
For example, in 2021, you can contribute $2,500 (for a $500 grant) and also contribute up to another $2,500 from the previous year i.e. 2020 (for an additional $500 grant).
Based on how the RESP contribution carry-forward rule works, the maximum CESG you can get in any one year is $1,000 and the extra CESG only applies to unused contributions from the previous year.
Related: How To Invest Your RESP
RESP Contribution Deadline
Contributions to an RESP can continue for 31 years and the plan can stay open for 36 years, after which it expires.
This leaves enough time for your child to go to school and sue the funds.
RESP money can be used to pay for the following:
- Trade school
- Apprenticeship program
If your child does not pursue post-secondary education or your funds remain in the RESP after it expires, there are several options you can consider.
The annual RESP contribution deadline is on December 31st.
RESP Over-Contribution Penalty
if your contributions exceed the lifetime limit of $50,000, a 1% penalty tax is levied every month on the excess contributions until it is withdrawn.
Related: Top Student Credit Cards in Canada
You can invest your kid’s RESP in a variety of investments including mutual funds, stocks, ETFs, bonds, and more.
In the beginning years, it makes sense to take on investment risk in exchange for growth and higher returns. As your child gets closer to starting college, their RESP portfolio should become more conservative.
If you want a hands-free investment option for your child’s RESP and low fees, a robo-advisor such as Wealthsimple can help.
Readers of Savvy New Canadians get a $50 cash bonus when they open a new Wealthsimple account and fund it with at least $500.
For more ideas on how to invest your RESP, check out this guide.
A 4-year undergraduate program can easily cost six-figures when you consider tuition, residence and inflation.
Contributing to an RESP early and often maximizes the government grants you collect and tax-free growth over the years.
One way to contribute consistently to the plan is to set up pre-authorized debits.