The last year in which contributions can be paid is the year the beneficiary reaches the age of 17. Starting at 1 or 18 eliminates the main benefits of government subsidies.Tax breaks are still useful, but only in certain cases. If you belong to a high tax rate (e.g. 40% or higher) and you donate a large amount, say $10,000. That saves about $120 in taxes per year (assuming a 40% tax rate at 3% interest). The interest portion of the account is taxed in your child’s hand when you withdraw it, but as long as it’s at a lower tax rate, you can save some tax money. It’s a good summer job to do and the tax benefits are pretty much gone. Especially if the money is spent in her one or two years.
Turning 17 year old
By the description “turning 17” I’m assuming the child is turning 17 in 2009. There are special rules for 16 and 17 year olds with respect to the government grants which mean that this child won’t qualify.
The rules are as follows:
RESPs for beneficiaries aged 16 and 17 will be eligible for RESP grants only if at least one of the following conditions is met:
- At least $2,000 must have been contributed to an RESP for the beneficiary before the end of the calendar year the beneficiary turned 15 and not withdrawn.
- At least $100 must have been contributed to an RESP for the beneficiary in each of any four years before the end of the calendar year that the beneficiary turned 15 and not withdrawn.
From the comment it appears that all the previous resp contributions were withdrawn which makes this child ineligible for any grants. My previous comment about tax sheltering for the 18 year old are still valid for this child.
15 year old
Finally some good news – the 15 year old is eligible for the 20% government grant for this year and the next two years – but only if $2000 is contributed this year (see above rule). Donna asked about “backdating” the contributions – the resp rules allow you to receive up to $500 of grants per year for past years in addition to the yearly maximum of $500 in grants for the current year contribution.
Put simply, Donna can contribute $5,000 for the 15 year old in 2009 and will receive $1,000 in grants. Then she can do the same in 2010 and 2011 – at that time she will have made $15,000 in contributions and received $3,000 in grants which is well worth the effort of setting up the account. In this case the tax sheltering effects are even more beneficial than for the older kids.
If she doesn’t want to contribute the maximum then I would suggest contributing a minimum of $2,000 this year otherwise this will be the last year the child will be eligible for grants.
Additional CESG grants
Donna didn’t say anything about income but if your family income is below around $78k then you might be eligible for additional resp grants which could mean grants of 30% or even 40% instead of the basic CESG rate of 20%. This of course would mean more grant money for the 15 year old.
Summary
If I were in Donna’s shoes I would make sure first and foremost that I didn’t invest in anything with any risk at all (resp or not) – there just isn’t very much time until this educational money is needed. Secondly, I would definitely open an resp for the 15 year old because there is a lot of potential grant money available. I don’t know if it’s worthwhile opening resps for the other 2 depending on other factors discussed. The 15 year old is the only one who will have a clear benefit from an RESP from the information given. I would also find out if she was eligible for any extra grants.