Ok let’s agree right now that the answer to this question is going to be very different for different families. By rights, I should really call this article “When Did We Start a RESP?”
Why We Didn’t Start a RESP When Our First Child Was Born
I now read many financial websites and blogs: I’m surprised at how many of the writers started RESPs as soon as their child was born. Well, pretty soon afterwards anyway. Your child does need a Social Insurance Number before you can open a RESP so there is some waiting time required.
We didn’t start an RESP then. In fact, we only opened our RESP when our eldest child was 10. Are we sorry we waited? Nope, not at all.
Why Wait to Start a RESP?
Here’s some of the reasons why we waited to open a family RESP for our children:
- we had a mortgage to pay
- we procrastinated
- we didn’t want to spend any time learning about RESPs
- we had RRSPs to contribute to
- we had heard horror stories (based on RESP scholarship plans) about huge fees and lost money
- we had TFSAs to contribute to
- I was not working for pay for some of the time our children were young
- we didn’t know if we wanted to contribute to our children’s education cost formally (with paperwork and frustration and banks involved)
- we didn’t see the sense in investing in possible future education costs for our children BEFORE investing in inescapable future costs for ourselves such as our pensions
Since you probably disagree with at least 2 of our reasons, you can understand why I said the decision about when to start an RESP is very personal.
Which Month Should You Contribute to a RESP?
Some readers may have landed on this page hoping to find out when as in “which month” they should start a RESP. My suggestion is two-fold:
If you have lots of extra cash, contribute to a RESP at the start of the year. You’ll get the matching CESG faster. And then both your contribution and the grant will have more time to grow, tax free.
If you aren’t sure how the year will go and you don’t have a large cash cushion to draw on, contribute to the RESP near the end of the year when you’re sure it’s a good idea. So long as you contribute before December 31, you are eligible to receive the matching CESG for that year. To be on the safe side, I’d suggest you make your contribution before December 25. Many financial institutions have very limited hours between Christmas and New Year’s which could make it hard to get in and contribute.
It’s Much Easier to Fund a RESP After a Mortgage is Paid Off
When we finished paying off our mortgage we had about $18,000 per year of money to put where it would do the most good.
Think about just how big that number is for a minute.
You could probably pay for one child to attend college or some university programs with just that $18,000 per year. Especially if they live at home, rent a really cheap student ghetto apartment or get good co-op placements while they’re learning.
We used some of this $18,000 in freed-up money to open a family plan RESP.
Why Did We Open a RESP for Our Children?
Our primary reason for opening an RESP was to get the 20% matching Canada Education Savings Grant from the federal government. (For those who don’t know, you can get up to $7200 per child from the government as of the time this was written.)
Given most secure investments only pay 1-2% per year, 20% is great. For example, if we divide the 20% by the 9 years between when we started to contribute to our eldest child’s RESP and when that child will probably start post-secondary education, that’s 2.2% a year.
So even if we left the money in a bank account paying 0% we would be ahead of the game.
And since we didn’t leave the money in a bank account, we can earn our own interest on the investment during those years and also earn interest on the grant money.
You Can Double Up the CESG Each Year as You Catch Up Your RESP Contributions
One thing I learned from the very useful articles Mike Holman has written and posted at Money Smarts is that you can catch up your RESP contributions.
If there were years after your child’s birth when you didn’t contribute the full annual maximum, you can contribute extra in later years.
The way it works is the “usual” contribution this year (2013) is $2500 for one child. That gets a matching government grant of $500.
If you contributed nothing in one of the earlier years, though, in 2013 you can contribute $5000 for that child and get $1000 from the government. If you contribute more than the $5000 that year, though, you won’t get any additional grant.
You can repeat this each year till you get caught up.
For instance, in the year my child turned 10, we contributed $5000 and got $1000.
We repeated this the next year, and the next year and so on.
To get to the maximum $7200, we would have to contribute $36000 in $5000 annual chunks.
That would take 7.2 years.
Unfortunately, you can’t contribute after the year in which your child turns 17, so we will have to forfeit the matching contribution on $1000.
So if you plan to do the same thing we did, try to start when your child is 9!
How Long Does It Take to Get a S.I.N. for my Newborn?
At the time this was written, in BC if you apply at the time you register the birth, and you are a Canadian citizen or permanent resident, it takes about 3-4 weeks.
Like many government items, the time to get a S.I.N. number by routine application to Service Canada can vary quite a bit.
- Free Education Money for Low Income Canadian Families’ Children: Apply Today
- Gifts that Help Save for Your Child’s Future Without Contributing to a RESP
- How to Open a Self Directed RESP at BMO InvestorLine
Did you set up a RESP? When? Would you recommend starting early or playing catch-up later? Please share your views with a comment.