Becoming a parent is a journey chock-full of surprises and new responsibilities. There’s the heart-melting first smile and the wobbly first steps, but also the 3 am wake-ups, the last-minute diaper changes and the fact that baby food always seems to end up on your best suit.
Though it may seem like the rigours of parenthood have given you more than enough priorities on your to-do list, there’s one item that should definitely be at the top – RESPs.
It’s never too early to start planning for your child’s post-secondary education, says Marie C. Blanchet, Senior Consultant, National Bank Financial Planning.
“We suggest you start as early as possible,” says Ms. Blanchet. “Even if it’s just a small amount, like $50 dollars a month – over the long term, it can make a significant difference for [your child] to be able to graduate from university virtually debt-free.”
To aid you in your education planning, here is a timeline of key dates in your child’s life, so you won’t miss out on maximizing the benefits of contributing to an RESP:
Birth: This is the ideal time to start saving for your child through RESPs. Even if you start small, your contribution will have many years to grow until your child is ready to enter college or university. As well, you can take advantage of the Canada Education Savings Grant (CESG). Human Resources and Skills Development Canada will match 20 per cent of your contribution to your child’s RESP annually, up to a maximum grant of $500 if you make a $2,500 contribution to the child’s plan.
If you have the means to contribute the $50,000 maximum all at once when your child is born, your child’s fund will be worth more than $150,000 by the time the child turns 18 (assuming an annual return of 6 per cent). Note though, that you’ll only get the grant for one year - $500 in CESG - when taking this approach.
Age 2: In order to receive the $7,200 lifetime maximum in CESG grant, start contributing now. If you can contribute $2,500 each year until your child turns 17, the plan will be worth more than $88,000 (once again, assuming a return of 6 per cent).
Age 10: Perhaps you were unable to contribute before now for financial reasons, or you just didn’t get around to it. Never fear – it’s not too late. If you contribute $5,000 each year for the next seven years, you’ll get a CESG of $1,000 each year, because you are able to carry forward the unused grant room from the first 10 years.
Age 16 or 17: In order to receive the CESG, RESPs must total at least $2,000 before the year in which the child turned 15, or be at least $100 per year in any four years preceding the year the child turned 16.
Age 18: Contributions to an RESP can be made for up to 31 years, though the plan can stay in existence for a maximum of 35 years.
Depending on your investor profile, the type of investments you choose for your RESP should change over the years. Early on, equities are generally considered a good idea in order to take advantage of long-term growth potential. Later on, a focus on fixed income and cash is prudent, as you prepare to take the money out.
A systematic savings plan can be a great way to contribute to an RESP, says Ms. Blanchet. To find out how this method could work for you, it’s a good idea to sit down with a National Bank financial advisor.
“We encourage people to sit down with their financial advisor because they might say, ‘You can afford to set aside $500 a month towards savings,’” she says. “Maybe [the parents] can put $200 towards two children’s RESPs, $100 to each, and then take the remaining $300 and make it an RRSP contribution. And then from there, when they get their tax refund in April, they can put it into a Tax-Free Savings Account.”
Waiting until your child is approaching their high school graduation to start planning can have negative financial consequences for parents, says Ms. Blanchet, who are suddenly faced with some difficult choices.
“Quite often people in their 40s or 50s have a mortgage, are paying down lines of credit and they’re looking at their own retirement and wondering if they have enough,” says Ms. Blanchet. “So they now have significantly conflicting objectives – providing for their child’s post-secondary education, and also providing for their own retirement down the road.”