Author: Mike Holman

Most new parents think about setting up an Registered Educational Savings Plan (RESP) when their child is born.  However, between 2 am feedings, lining up daycare and a general lack of money, it’s very easy to put the RESP idea on the backburner and forget about it.

The great thing about RESPs is that they are flexible enough that you can start one when your child is older and still get most, if not all of the free government grants.

Here are a couple of suggestions on when to start an RESP account for an older child and still get a decent amount of grants.

Start an RESP during the year your child turns 10

If you start contributing to an RESP account during the year your child turns 10, they can still receive the lifetime maximum RESP grant amount of $7,200.

To accomplish this – Contribute $1,000 in the year when the child turns 10 years old.  Then contribute $5000 per year up to and including the year when the child turns 17 years of age.

This will give you the maximum $7,200 grants for that child.

If you are eligible for additional grants based on income, the lifetime grant limit can be reached even if the RESP isn’t started until the year the child turns 11 years of age.

Additional grants are included in the $7,200 lifetime grant limit, which means you can contribute a bit less than the first example and still get the full grant amount. 

If your net family income is between $42,707 and $85,414, you can contribute $4,250 in the year when the child turns 11 and $5,000 for the next six years to get the maximum grant.

If your net family income is $45,414 or less, you can contribute $2,500 in the year when the child turns 11 and $5,000 for the next six years and still get the maximum grant.

The very last minute RESP

If your child is starting to talk about taking driving lessons next year and you still haven’t started an RESP account, it might not be too late.

This last minute strategy involves contributing in the years when the child turns 15, 16 and 17 to get the maximum allowable grant.

At this point you should have a decent idea if the child will be able to use the money, so there is less risk that you will have to collapse the account if they don’t attend post-secondary education.

If you are eligible for the basic 20% RESP grant, contributing $5,000 per year for the years where the child is turning 15,16 and 17 will give you a total of $3,000 of RESP grants.  Your RESP account will be worth $18,000 plus any earnings when the child is ready for school. 

If you are eligible for the 10% additional grant, the total grants will be $3,150.  If you are eligible for the 20% additional grant, the total grants will be $3,300.  To find out if you are eligible for additional grants, see the article RESP – Additional Grants Eligibility.

This is a pretty good deal. 

What about contributing in the last year or two of eligibility?  Unfortunately, if you haven’t started the RESP by the year the child turns 15, they won’t be eligible for any grants in the last two years.  Here are the RESP grant eligibility rules for 15, 16 and 17 years olds.

It helps to start early – even a small contribution is a great way to start

Dan Bortolotti of the Canadian Couch Potato blog and his wife are currently contributing $5,000 per year for both of their high-school aged kids in order get the maximum RESP grant amount before it is too late. 
Dan was only 24 years of age when he had his first child.  He and his wife decided to start an RESP and contribute $60 per month because that was all they could spare at the time.  He says

Over the years, we kept gradually increasing the monthly contribution.  It was only the last few years that we cranked up the contributions in order to get the maximum amount of RESP grants ($7,200 per child).

His advice to new parents

Start early and contribute what you can, even if it is a small amount.  Try to increase the contributions every couple of years.  Later on when the kids are older, call the CRA RESP phone line 1 800 267 3100 and ask how much contribution room is available.    Use this information to calculate how much you have to contribute to max out the RESP grant.

He also suggests temporarily lowering your RRSP contributions in order max out the RESP. 

You can make up your RRSP contributions later on, but there is a time limit on the RESP contribution room.

Dan also says

You can save for both your retirement and your kids educational plans, but not necessarily at the same time.  Reducing RRSP contributions for a few years frees up cash that allows us to get all the available RESP grants.

Conclusion

Ideally RESP accounts should be established when the child is young in order to capture the most growth from your investments.  It is possible however to start an RESP when the child is older and still reap many benefits from the program.

Many new parents take their newborns home from the hospital with the best of intentions to start an RESP account for their screaming bundle of joy.  The problem is that sometimes life interferes and maybe that educational savings account never gets set up.

Now the little screamer has grown up into a sullen teenager and you would really like to make sure you can afford to send her to a school in another city – far, far away.  Can you still make RESP contributions and get some free government grant money to make your dreams come true?   Read on to find out.

There are no special restrictions on RESP grants for kids in the years from when they are born to the year when they turn 15 years of age.  There are however, grant eligibility restrictions for kids during the years when they are turning 16 and 17.

RESP contributions made for beneficiaries in the year they turn 16 or 17 are eligible for a grant only if at least one of the following conditions is met:

1. At least $2,000 must have been contributed to, and not withdrawn from, an RESP for the beneficiary before the end of the calendar year the beneficiary turned 15 OR
2. At least $100 must have been contributed to, and not withdrawn from, an RESP for the beneficiary in each of any four years before the end of the calendar year in which the beneficiary turned 15.

Please note that only one of these conditions has to be met.

The difference between these two conditions is that the first one can be met by contributing the $2,000 over one or more years. The second one involves making contributions of at least $100, in at least four different calendar years.

It should be noted that the year a child turns 17 is the last year they can be eligible to receive RESP grants.

What this means

If you open a child’s first RESP in the year he turns 16 or 17 years of age, no grants will be paid on contributions. It is too late.

For a child to be eligible for RESP grants in the year she turns 16 or 17, either of the previously mentioned conditions must be met.

How to ensure your child is eligible for grants

The last year you can open a first RESP for a child and expect to receive any grants is during the year when the child turns 15. You need to contribute at least $2,000 that year in order for the child to be eligible for grants in the years he turns 16 and 17.

Just to clarify – The ages mentioned previously refer to the calendar year in which the child turns the appropriate age. If you have to make a contribution in the year the child turns 15, this means the contribution has to be made at some point between January 1 and December 31 of that year. In fact, the child might be 14 at the time of contribution if it takes place before the child’s birthday.

The last year you can start an RESP, make four annual $100 contributions and still be eligible for grants when the child is 16 and 17 is the year the child turns 12.

These age rules are important to know because if your child turns 15 this year and you are still thinking of opening an RESP for them, you need to act soon. It is still worthwhile to open an RESP in the year they turn 15. If you contribute $5,000 per year in the years they turn 15, 16 and 17, you will receive at least $3,000 in RESP grants.

Let’s look at an example of each rule

1) A total of $2,000 must be contributed towards the child’s RESP by the end of the year in which the child turns 15 years old.

Steven turns 15 years old in 2011. His parents decide to open an RESP account and contribute $5,000 per year for three years until Steven is not eligible for RESP grants anymore.

His parents contribute $5,000 in 2011, which is the year Steven turns 15. This means that the eligibility criteria for grants in the years he turns 16 and 17 is met. He will receive the full grants in the years where he turns 16 and 17.

Note – the minimum of $2,000 contributions don’t have to be made in the year the child turns 15.  They can be made anytime up to the end of the year where the child turns 15.

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2) At least $100 must have been contributed to the child’s RESP account in at least four different years prior to the year he turns 16 years old.

Susie is turning 16 in 2011. Her parents have an RESP account for her and want to know if she is still eligible to receive grants this year and next year when she turns 17.

Her parents check their statements and determine how much they have contributed in the past:

• 2002 – $50
• 2004 – $500
• 2005 – $100
  
• 2006 – $200
• 2008 – $500 – This amount was withdrawn.
• 2009 – $100
• 2011 – The year Suzie turns 16

As you can see, there are four different years where at least $100 was contributed to the RESP account and not withdrawn. This condition is met and Susie will be eligible for RESP grants in the years she turns 16 and 17 years of age.

Conclusion

Starting a last minute RESP is not something that most people plan on.  However, it’s a lot better late than never.  If you contribute the max for the last three eligible years, you can still receive 42% of the total available grants.  At that point, you are likely savings for the child’s schooling anyway, so it’s basically free money.

One of the main benefits of an RESP family plan account is that you can have RESP money for multiple children in one account, which is supposed to reduce costs and simplify your life.  In fact, there are some drawbacks of family plans which make me wish I had kept my kids’ RESP accounts separate.

In the RESP world, $7,200 is an important number.  It’s the total amount of RESP grant money that can be paid to any one child.  On the RESP contribution side, this means that once a child has received $7,200 of grants – any future contributions will not receive any grant money.

This rule also applies to the RESP withdrawal phase. When you are making payments to a student – that child cannot receive more than $7,200 worth of grants.  Any excess amount of grants paid to a child will have to be returned to the government.

But I thought all money in a family plan can be shared between beneficiaries?

Not always.

Let me explain:

In every RESP account there are two kinds of money – the contribution amount and the non-contribution amount (which is made up of earnings and grants).

• Contribution amount – Can be shared without restriction.
• Earnings (ie capital gains, dividends, interest) – Can be shared without restriction.
• Grants – Can be shared as long as the $7,200 grant limit per child is respected.

When you make an Educational Assistance Payment (EAP) to a student, it will come from the non-contribution portion of the RESP account and will always contain some grant money.  You don’t have the option of specifying how much of the EAP will be grant money – it’s an automatic calculation.

You do however have the option of specifying whether a payment to the student will come from the contribution portion (this is called a post-secondary education withdrawal or PSE) or the non-contribution portion (EAP).

Example

You have two kids – 15 and 18 years old.  They have a family RESP account and the grants have been maxed out the grants for both of them ($7,200 each).

Note – In reality, neither child in this example could have $7,200 in grants, since RESP grants were only available since 1998.  I’m just using it as an example.

If your eldest child starts post-secondary education, you will likely start making RESP withdrawals.  If some of those withdrawals are Educational Assistance Payments, they will contain grant money.

If you were to pay out all the non-contribution money to the oldest child, they would receive all the grant money ($14,400).  Because the limit per child is $7,200 – the excess $7,200 of grants would have to be paid back to the government.  This would be a very expensive mistake.

This overpayment scenario can happen as long as there is more than $7,200 of grant money in the family account.  If there is less than $7,200 of grants – you have nothing to worry about.

Won’t my financial company or advisor stop me from doing this?

No.  There are situations where overpaying grants to a beneficiary makes sense – such as when an older child decides not to go to school and you want to pay out all the non-contribution money to the younger child.

Federal rules dictate that when you make an Educational Assistance Payment, your financial institution has to send you a letter indicating the amount of the EAP and how much grant money was part of the payment.  Some institutions will even include the total amount of grants paid to that beneficiary to date.

The problem is that by the time you get the letter, it’s too late.  You need to figure out the grant situation before you request the EAP.

How to avoid overpaying RESP grants to a beneficiary

Every time you make an Educational Assistance Payment to a child, proof of enrolment has to be provided to the financial institution.  At that time you should ask the following questions:

1. How much grant money has been paid to the beneficiary so far?
2. How much grant money will be included in the withdrawal I’m about to request?

If the total of those two amounts is $7,200 or less, you may proceed. If not, you’ll have to lower the EAP amount.

Alternatively, you can just ask the financial institution to determine if you will go over the grant limit with your requested amount.

If you are getting near the $7,200 limit and want to use up all the available grant money with the the next EAP – ask how much the withdrawal amount should be.

Keep in mind that once you have used up all the available non-contribution money – you can still use any of the contribution money for withdrawals.

What if I just completed an EAP and put one beneficiary over the grant limit?

Call the financial institution ASAP and ask if they can cancel the withdrawal and redo it for the correct amount.  They might say no, but keep on them – they should be able to correct it.

More information

• 8 Things you need to know about withdrawing money from your RESP account
• RESP Guide