Written by: Kaleido
A number of parents open an RESP when their child is born, contributing a small amount every month to make sure they follow through in the long run. This can be a good strategy: investing a small amount, then forgetting about it so its growth becomes routine is a great way to maintain a savings discipline. However, it makes sense to reassess one’s financial situation along the way to make sure not too much money gets left on the table!
This is the strategy we suggest to parents who opened an RESP for their child but didn’t invest a large amount of money. For example, take Justin*, who just turned 14. His parents have been saving $20 a month in his RESP since he was born. When he turns 17, Justin's parents will have accumulated $4,080 in capital and $1,224 in government grants, which isn’t bad at all. But here’s the twist, Justin shows an interest for studies in science, which will cost considerably more than the savings accumulated to pay for these.
His parents could benefit from a significantly greater leverage effect by reviewing their capacity to contribute to their RESP, giving their son the means to pursue the education that will lead him to his dream career. This of course implies thinking ahead and doing the financial planning for post-secondary education!
Fortunately, it’s possible to recover retroactive entitlements to unused grant amounts. As Justin’s parents now have a better financial position, the best thing to do is adopt a strategy that will allow them to recover the maximum grant amounts to which they are entitled.
Concretely, Justin's parents could contribute an additional $4,760 annually for 4 years (during the years of his 14th, 15th, 16th, and 17th birthdays)1. In doing so, they would have additional savings of $19,040, and Justin would receive $5,712 more in grants from the provincial and federal governments. A smart way to make the most of their investment!
The short-term financial effort is a reality. But given the fact that Justin’s parents will quickly recover their investment2, they will have the means to finance their son’s education or use the money as they please... all while having received grant amounts for Justin’s studies that are more than interesting.
1. The contributions made to an RESP during the year in which the beneficiary reaches 16 or 17 years of age are subject to certain conditions with regard to the payment of government grants. See the prospectus or contact your representative for more information.
2. The time at which the subscriber recovers their capital varies according to the plan chosen. For a group plan, the refund occurs when the beneficiary reaches 17 years of age (maturity date). Under the INDIVIDUAL plan, the refund is made when the beneficiary satisfies the plan’s eligibility criteria.