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Are you falling behind when it comes to saving for your child's education? Don't worry, you're not alone. Many parents find themselves playing "RESP catch up" as they realize the importance of funding their child's future education. In this article, we will explore strategies and tips to help you get back on track and maximize your contributions to a Registered Education Savings Plan (RESP).

Whether you're just starting to save for your child's education or already have an RESP in place, this guide will provide you with valuable insights and practical tips to help you make the most of this vital investment vehicle. So, let's dive in and discover how you can unleash the full potential of your RESP and set your child up for a bright and successful academic journey.

What is an RESP and how does RESP work?

An RESP is a government-sponsored investment vehicle designed to help parents save for their child's post-secondary education. It allows you to contribute money into an account that grows tax-free until your child is ready to pursue higher education.

The way an RESP works is quite simple. Once you open an account, you can start making contributions. These contributions can be made by anyone, including grandparents, relatives, and friends. The money you contribute is invested and has the potential to grow over time. When your child is ready to attend college or university, they can begin withdrawing funds from the RESP to pay for their education expenses.

What are the benefits of having an RESP?

One of the main benefits of the RESP is that it offers tax-sheltered growth on investment earnings. This means that any money you make from investing your RESP savings will not be taxed. In addition to offering tax-deferred investment growth, RESPs have another benefit that can be leveraged. Through the Canada Education Savings Grant (CESG), RESP also offers government grants to help boost your savings.

RESP catch up contribution limits

Image With Text Educations  And A Jar With Coins
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When it comes to RESP catch up, there are certain contribution limits that you need to be aware of.

  • Maximum contribution limit per year: The maximum annual contribution limit is $2,500 per child.
  • Maximum grant per year: The Canadian Education Savings Grant (CESG) is a government grant that adds 20% to your RESP savings, up to a maximum of $500 per year. Therefore, if you contributed $2,500 in a given year, you'll qualify for the full $500 in grant.
  • Carry-forward option: If you don't get the full grant amount each year, any unused grant room accumulates and carries forward until the year a child turns 17. You can go back one year at a time to make up for missed contributions; the accumulated carry forward cannot be utilized simultaneously.
  • Maximum lifetime grant and contribution limits: The maximum lifetime grant is set at a limit of $7,200 per child and the maximum lifetime contribution limit of $50,000. This means that only $36,000 would qualify for the 20% CESG grant to reach the lifetime $7,200 grant limit.

What

How to play RESP catch up to maximize RESP grant or CESG?

Now that we know the rules, the ideal RESP contribution strategy for maximizing CESG is one where you are making annual contributions of $2,500 starting the year your child is born. Parents who have delayed starting an RESP or haven't been able to contribute enough each year to receive the maximum grant amount might be able to use their carry-forward option to take advantage of that "free" government grant money. Hence the carry-forward option effectively allows you to double up on contributions to help you catch up on missed grant money.

However, even though the carry forward deadline is available until the child reaches 17, it can be very difficult to catch up on utilizing any unused grants. This is primarily due to the carry-forward rule noted above, which only allows one to go back one year at a time to make up for missed contributions. This means that the maximum grant available in a given year is $1,000, which is based on a $5,000 contribution.

If you begin catching up when your child is young, it may still be possible to play catch up. However, if you wait until your child is much older to start saving, you may never be able to receive the maximum annual grant of $500 per child or a lifetime grant amount of $7,200 per child. Let's look at two examples.

Example 1

You decide to wait until your child is nine years old to start an RESP. In this scenario, you can contribute $4,500 annually until the child turns 16 years old and still receive the full $7,200 of lifetime grant money within the eligible timeframe.

Example 2

You decide to open an RESP in the calendar year your child turns 12. In this situation, you could have six years to contribute and you can play catch up on your CESG by doubling up on the grant amount every year through the carry forward option. Thus, a contribution of $5,000 annually would allow you to receive $1,000 of grant money each year ($500 for the current year and $500 for unused room from a previous year). This would mean a total grant amount of $6,000, which is less than the lifetime grant of $7,200.

As you can see in "Example 2", the longer you wait to contribute to an RESP, the harder it’ll get to play ‘CESG catch up’ and in certain situations, you may be giving up free grant money. As a general rule, if you are starting later, but still want to get the maximum amount in CESG, you’ll have to start making RESP contributions no later than the time your child turns 10.

Conclusion

In conclusion, an RESP is a powerful tool that can help you save for your child's education and give them a head start in life. RESP catch up is a valuable strategy that allows you to accelerate your child's education savings by maximizing your contributions. By taking advantage of the catch-up provision, you can make up for lost time and potentially grow your child's education fund faster.

Before December 31 of every year, take a few minutes to check your RESPs to make sure that you are on track to receiving the full CESG for the year. If not, consider making a catch-up contribution to ensure that you don't miss out on any free grant money.  If you have any questions on how to maximize your RESPs, please contact us.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

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Written by Neena Gambhir

I'm a Chartered Professional Accountant and have been navigating the waters of public accounting for over a decade. I've had the privilege to work with all sorts of clients – from small family-owned businesses to those big names on the stock exchange, spanning various sectors. Through these experiences, I've gathered a ton of knowledge, especially when it comes to Canadian corporate and individual taxes. I've also got a solid handle on the ins and outs of partnership, trust, and estate taxes.

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