The beginning of a child’s life is full of possibility. And even though your child is far away from knowing what they want from their future, it’s the best time to start saving towards his or her post-secondary education.
If you’re looking to do everything you can to set your child up for success, starting a Registered Education Savings Plan (RESP) as soon as you can will get you the best results. Once your child has a Social Insurance Number (SIN), they’re eligible to be the beneficiary of an RESP—so you can start saving right away.
On top of giving you the most time to reach an RESP’s $50,000 contribution limit per child, here are a couple of important reasons why an early start makes a big impact on your child’s future.
You get the most out of government grants
The Canadian Education Savings Grant (CESG) is one of the most powerful benefits you can access when you open an RESP.
The federal government will match 20% of the first $2,500 of your contributions, up to $500 a year to a maximum of $7,200 over the lifetime of your plan. The one catch is that the CESG will only match your contributions until the end of the calendar year that a child turns 17—making an early start extra important.
If you make a yearly contribution of $2,500 into your RESP starting when your child is born, you’ll have maximized the CESG by the time the child is 15. But things can get tricky if you start contributing later.
Total CESG amount at 18 years
Started saving at:
|Age 0||Age 5||Age 10|
If you start late, you’re allowed to make up for years that you didn’t make any RESP contributions or didn’t collect the full $500 of CESG for that year, but you can only receive $500 of grant for previous years during a year. This means that if you start when a child is 3, you can contribute $5,000 that year and the following two years to collect the missed CESGs. If you’re starting even later but still want to maximize your CESG money, you’ll need to start by the time your child is 10.
While this is a handy way for late starters to play catch up, it’s a much more difficult way to save for a child’s education. Putting aside $2,500 a year can be a challenge itself. Doubling that amount is even harder—and can be avoided by getting an early start.
Compounding has more time to work its magic
One of the best reasons to invest in an RESP is that it allows you to benefit from the long-term effects of compounding—and an early start is the best way to maximize its effects.
Compounding is one of the miracles of investing. Once an investment you make starts to grow, over time your earnings should also generate earnings as well.
The effects of compounding become more pronounced the longer you’re invested, since the earnings on your investment income should snowball over time.
Someone who maxes out their RESP contributions, but starts when a child is 8, might have less growth than someone who invested the same amount but started when their child was born. This is because their investment will have less time to grow with the benefit of compounding. You can catch up on the amount you invest, but it’s much harder to catch up on the effects of compounding!
Clearly starting an RESP early can help you make the most of your education savings. Wondering exactly how that would look? Give our planner a try and see how much more your savings could grow with an early start.
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