How much should you contribute to your kid’s education fund (RESP) in Canada?
An Registered Education Savings Plan (RESP) which functions a lot like an RRSP (Registered Retirement Savings Plan).
Brief Overview of Registered Education Savings Plan (RESP) Rules:
- You can only contribute to an RESP for someone under the age of 31
- $50,000 is the lifetime maximum you can put in the plan (no yearly limit or caps) per child
- You need to provide the Social Insurance Number (SIN) of each child you are contributing on behalf of
- You cannot use the money or interest paid to borrow said money to offset the income taxes you pay
- Your child has to submit proof that the money is withdrawn and used for EDUCATION (e.g. tuition)
- If you over contribute over the $50,000 you have to pay a 1% tax on the excess
FOR MAXIMUM SAVINGS / RETURNS:
$2500 a year will get you $500 a year from the Canadian government, which is a 20% return.
There’s a lifetime maximum or cap of $7500 given by the Canadian government.
So even if you could max out the RESP at $50,000 in one shot, don’t.
Contribute a bit each year.
$7500 / $500 = 15 years to max out the returns from the government
You can maximize how much money you get from the Canadian government if you consistently deposit $2500 into an RESP for 15 years, to obtain $500 each year.
Most children start university at age 18 – 19, so you would want to start contributing when they’re about 3 years old, to have the maximum benefit from the Canadian government by the time they’re ready to go to university at 18.
15 years x $2500 = $37,500 in total contribution
$2500 a year = $208.33 a month for each child
WHAT IF MY CHILD DOESN’T WANT TO GO TO SCHOOL?
You can roll over any RESP contributions into your RRSPs if you have outstanding contribution room available to be able to do so.
So if you max out your RRSPs each and every year, and then your child at 31 finally decides he or she doesn’t want to go to school and use the money, you are kind of hooped because you will not be able to rollover those RESPs into your RRSP.
Your only other option would be to withdraw the money but then pay taxes on the full amount (including any interest earned).
Not only that, you have to pay back that entire $7500 granted from the Canadian government (assuming you followed my model above).
WHY THIS DOESN’T WORK FOR ME AS A FREELANCER
I take my income in dividends.
As a result, I do not have RRSP contribution room each year as a result (dividends are not considered ‘earned income’) so I have no option of rolling over RESPs into my RRSPs (they’re already maxed).
Therefore, if my child decides to not go to school, that RESP account at the end would be basically have been treated as a non-registered investing account in my case, and I wouldn’t even get to keep the money from the government.
On the upside, if I do contribute to the RESP, my kid gets the money but I was already planning on NOT paying for their schooling.