Someone recently reached out to us and asked about registered education savings plans (RESPs) and if it’s too late to get started. Laura’s kids are 14 and 12, and while a bit late in the game, there is still time to take advantage of free government money.

What is an RESP?

An RESP stands for Registered Education Savings Program and is a way for parents to invest in their children’s future education. Essentially, the government will top up your contribution by 20% to a maximum of $500 per year which is called the Canada Education Savings Grant (CESG). Doing the math, that means contributing $2,500 into an RESP will result in receiving the maximum $500 CESG from the government per year and a lifetime maximum of $7200 per child

Catching up on RESPs

Opening an RESP when the child is born and contributing $2,500 would result in $500 in free money from the government. Doing this every year for 15 years would result in maxing out the government freebie ($7,200 max). But what if you are a bit late getting started? The bright side is that if you need to catch up, the government will allow you to carry forward your CESG room. How much? You can catch up on the previous year’s CESG in the current year. In other words, you can get up to a maximum of $1,000 in CESG in a year. So essentially, contributing $5,000 will max out the current years and the previous year’s CESG.

Although RESP accounts have the ability to carry forward contribution room, it’s best not to wait too long as there is a cut off the end of the calendar year that the student turns 17.

Starting Late – Laura’s Situation Even with kids that are a little older (14 and 12), with the ability to carry forward one year of unused CESG, Laura can still get some CESG money from the government. How much? Providing that Laura can put away $5k/year for the 14-year-old, she can obtain $4k in free CESG money. $4k in some provinces is enough for a year’s worth of tuition! This results in a total portfolio size of $24,000 before investment growth.

If Laura can put away an extra $5k/year for the 12-year-old, she can obtain $6k in free CESG money. This results in a total portfolio size of $36,000 before investment growth. Doing a little math by looking at the tables above, it’s apparent that age 10 is the latest age you can start an RESP and still max out the CESG ($7,200). RESP Investments Next question is how should this money be invested? As the investment timelines are compressed, I would suggest investing in a conservative manner, especially for the 14-year-old. With only a few years left until the money is needed, it’s not time to gamble on squeezing a few points out of the market.

Final Thoughts Specific to my friend Laura, even with older kids (14 and 12), opening RESPs (or a family RESP) today and contributing $5k for each child (until age 17) would result in a total of $10k in free CESG money. Some of the key takeaways from this is that providing the child is age 17 or under, it’s never too late to squeeze out a few free CESG dollars from the government. For the procrastinators, parents can wait until their children are up to age 10 to open an RESP and still get the $7,200 maximum CESG. However, if possible, I would suggest opening an RESP as soon as the child is born to take advantage of tax-free compounding returns.