We all want what’s best for our child — health, happiness and of course, a bright future. It’s a good idea to start planning early for your child’s post-secondary education, and one of the ways to maximize your savings is to start by opening an RESP.
What is an RESP?
RESP stands for Registered Education Savings Plan. An RESP is a special saving account for parents/guardians, grandparents or other relatives who want to save for a child’s post-secondary education. Read on to find out how RESP works and how you can maximize your RESP investments.
What are the benefits, and why do Ottawa CFPs recommend opening an RESP?
First, government grants!
The government will match 20% of your contributions up to $500 per year to a lifetime limit of $7,200. You can contribute up to a lifetime maximum of $50,000 per child to receive this beneficial treatment. Modest-income families may also qualify for Canada’s Learning Bond (CLB), which provides an additional incentive of up to $2,000.
Tax-free growth of the investments within the RESP is also another great benefit. Like an RRSP, RESP earnings are not taxable as long as they remain in the RESP. That means, your savings can grow even faster!
How to max out your RESP?
Since the maximum lifetime grant amount you can receive from the government is $7,200, you would need to make a lifetime capital contribution of $36,000 at the 20% grant rate.
In the first year, a winning strategy is to plunk in $16,500, (the $2,500 to get your grant plus an “extra” $14,000), and then plan to contribute $2,500 a year for every subsequent year until you hit $50,000 contributions. The sooner you invest, the faster it grows!
To max out the RESP you will want to contribute the whole $50,000 over time keeping in mind that amount $14,000, (excess over $36,000) of that capital won’t garner the 20% government grant. Since there is no associated annual grant money, $14,000 can be contributed to your RESP right away to maximize the timeframe for tax-free growth within the RESP. To ensure you get all of your grant money, you will need to contribute a minimum of $2,500 a year to reach the annual grant cap of $500.
If you do the math, you will need to contribute $2,500 a year for fourteen years, topping it off in year 15 with a final $1,000 contribution.
If you follow this strategy, you will have maxed out the available government grant and time frame for tax-free growth in an RESP, and if you have another child, you can roll this out all over again! If you wish to learn more about the benefits of an RESP, don’t hesitate to reach out to your Ottawa Certified Financial Planner!