The New and Improved RESP
The Financialist • Issue 95 • October 2007
BY JACQUELINE SIAH BSc CIM CFP
With the continued rise in the cost of higher education, Registered Education Savings Plans (RESPs) continue to be an invaluable savings vehicle to help achieve education funding goals.
Along with the recent changes in the latest Federal Budget came some fine-tuning to existing RESP rules, making an already good education savings vehicle even better. Effective for the 2007 taxation year, there are three main changes to existing RESP rules:
- The $4,000 annual contribution limit has been eliminated
- The lifetime contribution limit has increased to $50,000 from $42,000
- The maximum annual amount Ottawa will pay into an RESP through the Canada Education Savings Grant (CESG) has been increased to $500 from $400 (and to $1,000 from $800 if there is unused grant room from previous years).
In order to make the most of these changes, you may want to start by reconsidering your investment approach to RESPs.
For example, if you have been investing $2,000 per year for a child to maximize the $400 annual CESG limit, you will likely want to boost that amount to $2,500 to secure the new maximum $500 per year in grant money.
That said, please note that there is no change to the lifetime CESG limit of $7,200 per beneficiary. The increase in the annual CESG limit simply means that the (maximum) grant can be earned sooner, thereby allowing the funds to remain invested for a longer period of time. Given the value of compounding, an extra $100 CESG per year in the earlier RESP contribution years can add up to significant additional savings over time.
The elimination of the annual contribution limit also means that you can invest $50,000 into an RESP right away. In doing so, you will forfeit $6,700 in grant money, since the maximum annual CESG payable is capped at $500 (except where you have unused grant room from a previous year). Assuming that you had $50,000 per child to invest in an RESP right away, it makes sense to make the lump sum contribution even though you are giving up most of the grant money. The money earned through the power of compounding should more than make up for the loss of $6,700 worth of grant money over time.
It goes without saying that most young families likely won’t have $50,000 up-front to deposit into an RESP. Gradually accumulating funds in an RESP provides not only a steady stream of funds, but a disciplined approach to saving for your child’s future education.
As with any savings objective, it is important to tailor a plan that works specifically for you, and to monitor that plan regularly to ensure it remains on target. An RESP is no exception. The new and improved RESP rules allow for greater flexibility in achieving those objectives. For more information on RESPs, please contact your financial advisor.