Registered Education Savings Plans (RESPs) can help you save for your child’s education. Here are six good reasons to use an RESP.
1. Government grants
You can contribute personal savings to an RESP, but there are other ways to add to your savings. The federal government matches contributions to your RESP each year through the Canada Education Savings Grant. Some families with lower income may also qualify for the Canada Learning Bond.
2. RESP savings grow tax free
RESPs are tax-sheltered accounts, similar to Tax-free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs). That means you don’t pay tax on any investment earnings while the money stays in the RESP.
3. Education Assistance Payments are taxable in the hands of the student
When your child enrols in post-secondary education, they can start taking educational assistance payments (EAPs) from their RESP. EAPs are made up of the investment earnings and government grant money in the RESP. Tax on EAPs is payable in the hands of your child when they withdraw the payments — not you. Since students tend to have little or no income, they likely won’t have to pay much tax on the payments. Contributions can be withdrawn by you or by the student tax-free.
4. You can save or invest in an RESP
Like other registered savings plans, RESPs can hold both savings deposits and investments. With group RESPs the plan dealer makes the investment decisions. With other types of RESPs, you can choose investments that best suit your investment objectives, risk tolerance, and time horizon. Different providers offer different investment options. Some examples of investments you could hold in an RESP are stocks, bonds, mutual funds, or GICs.
5. Friends and family can contribute
Anyone can set up an individual RESP for your child – not just you. Your child’s RESP can grow more quickly with contributions from friends and family. Consider encouraging monetary gifts on special occasions to contribute to your child’s RESP.
6. RESP accounts can stay open for up to 36 years
If your child chooses to defer their education plans after high school, they can still use the RESP money when they are ready to go back to school. But check the rules of your RESP to make sure there are no restrictions on waiting to continue their education. Under specified plan rules, RESP accounts for beneficiaries eligible for the disability tax credit can stay open for up to 40 years.
Caution
Group RESPS have different restrictions and fees than self-directed RESPs. If you sign up for a group RESP through a scholarship plan dealer, you have 60 days after signing your contract to cancel plans without any penalty. Be sure to read and understand the rules outlined in the short Plan Summary provided in the plan prospectus. Always know the fees involved when you open a new account.
Summary
There are many good reasons to open an RESP if you want to save for your child’s education.
- There are government benefits like the Canada Education Savings Grant and Canada Learning Bond to help you save in the RESP.
- RESPs are tax-sheltered, which means your money grows tax-free while it stays in the account.
- Payments from the RESP are considered taxable income for the child, not the parent.
- RESPs can hold both savings deposits and a range of investments.
- Friends and family can also contribute to the RESP.
- RESPs can stay open for up to 36 years, if your child chooses to defer their education.
