The financial relief provided by a registered education savings plan (RESP) aims to prevent running into a stack of unpaid bills when contributing to a child’s educational future. RESPs are beneficial to a child’s parents or contributors: every dollar they invest in the plan will multiply over time.
Contrary to popular belief, RESPs are within reach for families on tight budgets. Want to do everything you can to ensure your little one’s educational future? Here are some important points you need to know about these investments before you get started.
The first step is simple: to open an RESP, the subscriber – the person who opens the RESP and names a beneficiary to the account – must have a social insurance number (SIN). The recipient(s) must also have a SIN and be Canadian residents.
As with most financial products, RESP returns vary according to several factors linked to the markets and investment type chosen. Here’s our general rule, though: the sooner you start saving, the bigger the cumulative earnings.
This is the RESP’s main attraction: the earnings stem from the fact that a government grant is added to every contribution, at both federal and provincial levels! The Government of Canada offers grants, encouraging Canadians to save for their children's post-secondary studies. Several provinces offer additional grants of their own as incentives. The extra cushion ultimately makes its way into the recipient's RESP.
Through the Canada Education Savings Grant (CESG), the government will invest a percentage of every dollar invested into an RESP, up to a specified amount annually (and up to a specific lifetime grant amount).
Thanks to this government aid, regardless of the family's financial situation, money invested in an RESP earns a minimum return of 30%, not including the gains from other investment products.
Unlike the Registered Retirement Savings Plan (RRSP), the RESP is conducive to reducing your taxable income: the capital that is invested in the RESP and any admissible grants grow tax-free.
The recipient may receive the money from the RESP in the form of Educational Assistance Payments (EAP) when it is time to start their post-secondary studies in a qualifying educational program. That said, it’s important to note that the EAP is exclusively made up of money from grants and investment income. It doesn’t include the amount of contributions paid by the RESP subscriber.
The subscriber can recover the RESP contributions without any further fiscal impact, since tax on the invested amount has already been paid. The choice is theirs to do with the amount as they please, even choosing to transfer it to their RRSPs.
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