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Late Starting your RESP? Here’s how to Catch UP!

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A friend of mine, Gary, recently asked me about registered education savings plans (RESPs) and if it’s too late to get started. Gary’s kids are 14 and 12, and while a bit late in the game, there is still time to take advantage of free government money.

What is an RESP?

An RESP stands for Registered Education Savings Program (my article with RESP details) and is a way for parents to invest in their children’s future education.

Contributions are after-tax (ie. no tax refund), but the account grows tax-free.  While withdrawals are taxable (contributions can be withdrawn tax-free), they are taxed in the student’s hands.  So essentially, providing the student has little income while they are in post-secondary, the withdrawals will face very little tax.

The icing on the cake is receiving the government matching grants on contributions.  Essentially, the government will top up your contribution by 20% to a maximum of $500 which is called the Canada Education Savings Grant (CESG).

Doing the math, that means contributing $2,500 into an RESP will result in receiving the maximum $500 CESG from the government per year and a lifetime maximum of $7200/student.

Catching up on RESPs

As outlined above, opening an RESP when the child is born and contributing $2,500 would result in $500 in free money from the government.  Doing this every year for 15 years would result in maxing out the government freebie ($7,200 max).

But what if you are a bit late getting started?  The bright side is that if you need to catch up, the government will allow you to carry forward your CESG room.  How much?  You can catch up on the previous years CESG in the current year.

In other words, you can get up to a maximum of $1,000 in CESG in a year.  So essentially, contributing $5,000 will max out the current years and the previous years CESG.

Although RESP accounts have the ability to carry forward contribution room, it’s best not to wait too long as there is a cut off the end of the calendar year that the student turns 17.

Starting Late – Gary’s Situation

Even with kids that are a little older (14 and 12), with the ability to carry forward one year of unused CESG, Gary can still get some CESG money from the government.  How much?

For the 14-year-old, providing that Gary opens an account in 2019, here are the contributions and maximum CESG until age 17.

Contribution
CESG

2019 (age 14)
$5,000.00
$1,000.00

2020 (age 15)
$5,000.00
$1,000.00

2021 (age 16)
$5,000.00
$1,000.00

2022 (age 17)
$5,000.00
$1,000.00

Total:
$20,000.00
$4,000.00

As you can see from the table, providing that Gary can put away $5k/year for the 14-year-old, he can obtain $4k in free CESG money.  $4k in some provinces is enough for a year’s worth of tuition!  This results in a total portfolio size of $24,000 before investment growth.

For the 12-year-old, providing that Gary opens an account in 2019, here are the contributions and maximum CESG until age 17.

Contribution
CESG

2019 (age 12)
$5,000.00
$1,000.00

2020 (age 13)
$5,000.00
$1,000.00

2021 (age 14)
$5,000.00
$1,000.00

2022 (age 15)
$5,000.00
$1,000.00

2023 (age 16)
$5,000.00
$1,000.00

2024 (age 17)
$5,000.00
$1,000.00

Total:
$30,000.00
$6,000.00

Providing that Gary can put away an extra $5k/year for the 12-year-old, he can obtain $6k in free CESG money.  This results in a total portfolio size of $36,000 before investment growth.

Doing a little math by looking at the tables above, it’s apparent that age 10 is the latest age you can start an RESP and still max out the CESG ($7,200).

RESP Investments

Next question is, how should this money be invested?  As the investment timelines are compressed, I would suggest investing in a conservative manner with a healthy amount of fixed income and cash – especially for the 14-year-old.  With only a few years left until the money is needed, it’s no time to gamble on squeezing a few points out of the market.

Final Thoughts

Specific to my friend Gary, even with older kids (14 and 12), opening RESPs (or a family RESP) today and contributing $5k for each child (until age 17) would result in a total of $10k in free CESG money.

Some of the key takeaways from this post are that providing that the child is age 17 or under, it’s never too late to squeeze out a few free CESG dollars from the government.  For the procrastinators (often me), parents can wait until their children are up to age 10 to open an RESP and still get the $7,200 maximum CESG.  However, if possible, I would suggest opening an RESP as soon as the child is born to take advantage of tax-free compounding returns.

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