People aren’t taking full advantage of their RESPs and RDSPs, says Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management.
RESPs allow parents to save up to $50,000 for their children’s educations and they also offer access to the Canada Education Savings Grant. The grant is equal to 20% of the amount they contribute (up to $500 per year). Grants top out at $7,200 per child.
However, “many parents are putting in the bare minimum, and it’s a wasted opportunity,” says Golombek, who adds, “Putting in larger amounts gives people more tax-free growth.”
Further, he says when funds are withdrawn, “contributions come out tax-free, with the income and grants being taxable to the child.” And in most cases, kids don’t pay any tax on RESP withdrawals due to tuition, education, and textbook credits.
The problem is most families nowadays are putting off contributing due to other priorities, such as paying down mortgages. “In a typical example, [parents] start when their kids are 10 and max out contributions to get grants, finishing [the process] when kids are 17.”
But it’s best to start contributing when a child is born, suggests Golombek. He says parents should put down $16,000 in the first year, and then spread out the rest of their contributions. Using this approach makes a huge difference in the amount clients can save.
For their part, RDSPs have only been around for five years and can only by used by people who qualify for the disability tax credit. They must also must have severe disabilities that are expected to last permanently.
There are specific restrictions because the government benefits are generous; “there’s the Canada Disability Savings Grant that offers up to $3,500 a year, and the Canada Disability Savings Bond that offers up to $1,000 a year for simply contributing,” says Golombek.
Say a family contributes $1,500 per year for 20 years, he adds. With the $30,000 they would accumulate, “they could get up to $70,000 in government grants, [along with] $20,000 in government bonds.” If their funds grow “at a nominal rate of 3% over a period of 20 years, [their] total accumulation would be more than $165,000.”