One of the most popular savings accounts for those who have children in Canada is a Registered Education Savings Plans (RESP) which is a type of savings account that offers tax benefits while also helping you save for your child’s post-secondary education. The government also adds money to your RESP through grants, which can help make saving for college or university more affordable. There are many benefits to having a Registered Education Savings Plans (RESP) in Canada. The most obvious benefit aside from saving for your child’s academic future, is the bonuses provided by the government. Although, contributing to an RESP does not offer you the benefit to reduce your taxable income and save on your taxes like you would in an RRSP, the money in an RESP grows tax-free until it is withdrawn for educational purposes. Here’s everything you need to know about RESPs, including how they work, pros and cons, and what the benefits are and more!
What is a Registered Education Savings Plan (RESP)?
A RESP, or a Registered Education Savings Plan is a way to save for a child’s education. The RESP is a savings account that is sponsored by the federal government. They are similar to an RRSP, in that they offer some tax advantages, but they are geared toward education. They are designed to help people save for future education costs, like tuition and textbooks, and can be used for other post-secondary education expenses as well, like transportation or rent. RESPs are investments, so they have a minimum amount that you’re required to contribute each year, much like an RRSP.
The RESP doesn’t need to only be set up by the immediate parents of a child, rather there are three different types of plans: an individual plan, family plan and a group plan. The government contributes money each year on your behalf, toward your child’s education. You can invest the money in an RESP using a variety of investment options, such as GICs, mutual funds, and stocks.
What makes the Registered Education Savings Plan (RESP) account so special is the Canadian government can pay you grants and bonds towards your child’s RESP account. The government will offer up to $2,500 or 20% of the contribution made by the sponsor in grants and bonds yearly. The Canada Education Savings Grant (CESG) offers up to a total of $7,200 in grants, while the Canada Learning Bond (CLB) offers up to $2,000 in grants for RESP accounts for children from low-income families.
Benefits of Registered Education Savings Plans (RESP)
Setting aside money for your child’s post-secondary education is crucial, the RESP account is the best vehicle to make contributions, as it is tax deferred and can receive grants or bonds from the government to maximize growth to your savings. A lifetime total contribution limit of $50,000 can secure your child’s future education plans and government programs like the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are government contributions that can help grow the savings yearly.
There is no yearly limit to how much you want to put into the RESP but it is worth trying to contribute $2,500 yearly because the government will contribute 20% ($500) in grants that year. This is not mandatory, and you can receive up to $1,000 in grants per year, so if you cannot contribute $2,500 yearly to the RESP, there are still other ways to save and receive government contributions. You can contribute to the RESP for a total of 31 years and the plan can remain open for 35 years! This is an ideal way to save for your child’s education even if they start later on, and the RESP can also be useful for those who have children pursuing postgraduate studies.