How Grandparents and Other Family Members Can Help Contribute to RESPs
RESPs are one of the best ways for parents to save toward the post-secondary education costs of their children, but they’re not being used as much as they should be. There are many reasons why parents are not contributing to RESPs.
Some parents are too financially stretched to afford to make RESP contributions. Raising children is expensive. Not only do you take a pay cut when you go on maternity or paternity leave, childcare costs add up. You can end up spending over $2,000 a month on childcare costs. On top of that, you may have a mortgage or rent to pay, and unless you’re fortunate enough to have a defined benefit pension plan, you’ll need to save toward retirement.
Some parents don’t contribute to RESPs, because they don’t understand their true benefits. Other parents believe their child should pay their own way through college or university as a life lesson.
The Bank of Grandma and Grandpa
If parents are unable to help their children save toward college or university, that’s where grandparents and other family members can provide some financial assistance. Many grandparents, aunts and uncles give money or gift cards for birthdays or special occasions. How about contributing to an RESP instead?
If your family is already planning to gift money, it won’t cost them anything extra by contributing to an RESP. Provided they qualify, the child will also end up with more money in the end due to the Canada Education Savings Grant (CESG), which adds an additional 10 or 20 per cent to the first $500 put into the RESP each year.
When I was younger, I used to receive $500 over the holidays (for which I’m grateful), but if my family had contributed it to an RESP, I would have received an extra $100 each year in free money from the government.
Over time, that really adds up. If my family had contributed $500 per year, including the $100 grant, I would have had $10,800 sitting in my RESP at age 18 (and that’s not even factoring in the investment returns or growth).
Better Understanding of RESPs
As I’ve mentioned, many parents, grandparents and family members are not taking advantage of RESPs, because they don’t understand their true benefit. By contributing $2,500 a year, a child can be eligible for the full $500 CESG from the federal government. The contributions and grant money are invested in lower risk investments and grow tax-free over the lifetime of the plan.
When setting up an RESP, Heritage offers two: an individual and a group plan. As its name suggests, an individual plan is only intended to pay the education costs of one beneficiary, whereas with a group plan, income earned is pooled and distributed among its beneficiaries. If one of the children does not attend college or university and withdraws from the plan, their share of the pool is then distributed among the remaining members, which is known as attrition.
There’s a $50,000 lifetime contribution limit for RESPs. It’s important for family members to keep track of this. For example, if parents and grandparents are contributing separately toward RESPs, it’s their responsibility to make sure not to contribute more than $50,000 per child.
To get the most of out of RESPs, I encourage you to open them as soon as the child is born. When family works together and contributes every single year, the child could have most, if not all, of their education costs covered when they’re ready to go off to college or university. I can’t think of any better gift than that.