Education is expensive. If you are looking to help your child get a post-secondary education, why not look into an RESP? A registered education savings plan is one of the best and most tax-friendly ways to save for your child’s post-secondary education.
According to the Canadian Federation of Students, the average student graduates with over $27,000 in debt and this amount is only expected to continue increasing. RESP provides an ideal way to lend your child a helping hand in reducing this deficit. It combines flexibility, tax deferral and direct government assistance to help you save for your child’s education.
What is an RESP?
RESPs are a savings plan that parents or guardians can set up for their children to help save towards their post-secondary education. When your child is ready to start college or university, the money is handed directly to them. Unlike the popular belief, investing in an RESP is not beyond the reach and financial ability of families running on a tight budget. Here are a few facts that you need to know about investing in an RESP.
Who can subscribe to an RESP?
Anyone with a Social Insurance Number (SIN) can open an RESP. The recipient needs to be a Canadian resident and should have a SIN.
What returns should you expect from your education saving plan?
Your returns will vary depending on various factors, including the type of investment chosen and the current financial markets situation. However, the earlier you start saving, the higher your returns will be due to the cumulative earnings.
The main charm of an RESP concerning earnings comes from the fact that every contribution made is boosted by a government grant at the national and provincial level. The Canadian Government put this incentive in place to encourage Canadian parents to save for their children’s post-secondary education. Some provinces, like Quebec, provide grants as an incentive with the additional amounts being paid directly into the recipient’s RESP.
To be more specific, Knowledge First Financial, one of Canada’s largest RESP providers, mentions that RESP subscribers from Quebec can expect up to $3,600 from the Quebec Education Savings Incentive. To find out more information about the grants available in your own province you can read more Knowledge First Financial online reviews or contact them directly.
RESP Benefits From Canada Education Savings Grant
The Canadian Government, through the CESG (Canada Education Savings Grant), gives you 20% on every dollar you save in an RESP, which can go up to $500 annually or a lifetime grant of $7,200.
You can also get an extra 10% to20% on every dollar of the $500 saved each year through the Additional Canada Education Saving Grant (A-CESG).
RESP Benefits For Low-Income Families
The Canadian Government also provides additional incentive through the (CLB) Canada Learning Bond to help low-income families to contribute to the RESP. Eligible low-income families receive the CLB incentive which offers an initial payment of $500 trailed by yearly payments of $100 for up to 15 years.
Thanks to all of these government aids, regardless of a family’s financial situation, the money they invest in RESP earns benefits of at least 30% before accruing in an investment product. Unused grants can accumulate until your child turns 17, for a maximum of $1,000 each year.
Tax Benefits of the RESP plan
Unlike RRSPs (Registered Retirement Savings Plans) contributions made to RESP are not tax-deductible. However, the investment growth is tax-deferred up to the time the fund is withdrawn. The investment growth is taxed at the recipient’s tax rate.
Since the recipient is normally a post-secondary student, their tax rate is usually low due to low income. The contributions are not deducted when withdrawing because they have already been taxed. The capital put in the RESP and permissible grants grow tax-free.
All these tax benefits and government incentives make an RESP an attractive way of saving for your children’s post-secondary education. For families with more than one child, parents are advised to open a family plan. Family plan RESP provides a grand tax planning strategy for families.