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Perfect Time to revisit Registered Education Savings Plans

Now that the kids are back to school, it’s a great time to talk about the recent changes to Registered Education Savings Plans (RESPs). Changes to RESPs at both the federal and the provincial level, make RESPs a more attractive option than ever for saving towards your children’s education. This summer, the government passed the following changes:

1. More free money. Previously, contributors would get the Canada Education Savings Grant (CESG), which is 20% for every dollar contributed up to a maximum of $2000 of contribution per year. Effective this year, the government has increased the CESG to a maximum of $2500 per year of contribution per year. The government would contribute $500 of CESG based on a maximum $2500 contribution. In my case, I have three children which means I can contribute as much as $7500 for all three kids and the government would put in $1500 for a total contribution of $9000. The maximum CESG that each child can get in a lifetime is $7200 remains unchanged. That means I can contribute the maximum ($2500) for fourteen and a half years to maximize the grant money from the government.

2. Catching up on previous years contributions. If you have not made contributions to the RESP in previous years, you are allowed to do some catch up. The government allows you to contribute a maximum of $5000 per year per child and qualify for the CESG on the entire contribution. In other words, you can only catch up one year at a time. In my case, although I have three children, Jason was born in 2007. Thus, he would not be eligible for contributions for 2006. If I had not made RESP contributions in the past, I could contribute a total of $12,500 for my kids ($5000 for Robbie, $5000 for Connor and $2500 for Jason).

3. No annual maximum contribution. Although the maximum you can contribute to the RESP and still qualify for the CESG is $5000, you can contribute as much as $50,000 lump sum. However, in doing so, you waive your future CESGs. In other words, ff I contributed $50,000 for my youngest son Jason who was born in 2007, I would get the CESG for 2007 or $500. However, no future CESGs would be available. On one hand, I would get tax deferred compounding for Jason for the next 20 years but I would lose $6700 of CESG from the government. I think I would opt to invest the $50,000 into a non-RRSP investment into tax efficient investments and stream $2500 per year into the RESPs to get the CESG grant money.

4. Alberta Centennial Education Savings Plan (ACES). For Alberta only, the government will contribute $500 into an RESP for children born or adopted by an Alberta resident beginning in 2005. The Alberta government will contribute an additional $100 for children when they turn 8, 11 and 14. In my case, I have two of the three kids that were born 2005 and later which means I qualify for $1000 from the Alberta government. Although my oldest, Robbie was born prior to 2005, he will still get the $100 when he turns 8, 11, and 14. All you have to do is open up an RESP and contribute something to the plan to qualify. This grant money and earnings is transferable among siblings.

So there you have four great reasons to start contributing to RESPs. Anyone like grandparents, uncles and aunts can contribute to a child’s RESP but remember these limits discuss are for each child. Make sure there is some communication with the parents if you want to contribute to the RESPs.

Nora Cole

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