After reading the first article on RESPs, you should be fully aware of the potential that an RESP has towards saving for your child’s education. No doubt if you’ve decided to through the route of setting up an RESP, you’re looking to capitalize on the numerous grants that the Canadian or Provincial governments offer. The most popular education grant for most Canadians is the Canadian Education Savings Grant (CESG). Hey! Who doesn’t like free money?
The CESG provides any Canadian child under the age of 18 with a $500 grant each year retroactive to 1998. What this means is that even if you decide to open an RESP account when you child is 6 years old, the grant money for the previous 5 years is still available to you. So don’t worry if you feel you missed the boat and lost out on the ability to get free money from the government. You still have time to make it back up.
On top of being retroactive, the grant money that was not received also carries forward as well. This means that even if you are cash strapped and cannot afford to contribute $2500 a year to receive the maximum $500 grant, the remaining grant money will carry forward to the next year.
As an example:
You have a 6 year old child, and you open an RESP for that child. You only have $1000 to contribute to the RESP this year, so you are eligible to receive $200 in grant money.
The following year, the amount of grant money available would be $500 x 5 years + $300 carry forward + $500 2018 grant = $3300.
The retroactive amount still remains at $2500. The unused portion from this year would be $300 and the new grant amount of $500 would become available the following year. That’s how you would still have $3300 of grant money available the following year.
One thing to note is that when the child turns 18. No more grant money can be received. Even if there is any unused grant portion left over, that child will no longer be eligible to receive the grant money.
Despite the fact that grants can carry-forward there is a catch. The government will only pay up to $1000 of grant money each year. That means that if you end up with a lot of grant money, you can’t receive all of it all at once with one single large contribution. You can only receive an additional year’s worth of grant money.
Still confused? Let’s check out this scenario:
Your child turns 7 years old and has $3300 in grant money still available. Since you got a big bonus at work you decide to save it for your child’s education and contribute $15,000.
The actual grant money you would receive is $1,000 even though $15,000 x 2 = $3000.
In any given year, only a maximum of an extra $500 in grant money can be received on top of the current year’s limit of $500. That means contributing anything more than $5,000 a year is useless if all you are trying to do is get the 20% CESG. If you really want to catch up on missed grant money, you will have to plan it out and start contributing more each year for many subsequent years.
The Last Years
I’m not sure who came up with the rules for CESG, but whoever did sure made up some really strange rules. There’s a special 16, 17 age rule for beneficiaries of the RESP. In order to receive grants one of the following two rules must be met:
- At least $2,000 has been conributed to the RESP before the end of the calendar year where the child turned 15.
- At least $100 in contributions were made and no withdrawals were made in 4 years before the year the child turns 16.
Those rules make no sense whatsoever when reading them but examples make it easier.
Rule 1 – If your child turns 15 in 2017, then as long as $2,000 in contributions were made before the end of 2017 then your child will be eligible for grants in age 16 and 17
Rule 2- If your child turns 16 in 2018, then contributions that look something like this would qualify:
2009 – $150
2012 – $100
2013 – $200
2015 – $100
It doesn’t matter that you missed years. As long as you have 4 years where you contributed money without taking any out, then the child will qualify for grants in age 16 and 17.
Don’t Wait Too Long
The one caveat of the trying to get the entire CESG amount of $7,200 is that you can’t start too late. Since only 1 extra year’s worth of grants can be accumulated on any given year, that limits to how much time you have to actually claim everything.If you end up starting the RESP when the child is already in high school, then there is no way that the entire grant can be claimed.
Starting early also has the benefits of allowing compound interest to grow principal. In fact, it’s actually more beneficial to put a large sum up front and let it invest tax free in a balanced portfolio for 18 years than it is to only contribute $2,500 a year and try to collect the grant money only.
Of course this is really hard to do, since having a baby incurs large costs. Nevertheless, it’s always worthwhile to open an RESP early and start thinking about saving a little bit so that your child will have the choice later on to use the RESP to pay for school or not.