6 reasons to open an RESP
1. Government grants
The federal government adds to your RESP savings each year through the Canada Education Savings Grant. Lower-income families may also qualify for the Canada Learning Bond.
2. RESP savings grow tax free
You don’t pay taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition on any investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition as long as they stay in the RESPRESP See Registered Education Savings Plan.+ read full definition. That means your savings can grow faster.
3. EAPs are taxable in the hands of the student
When your child enrols in post-secondary education, they can start taking payments, called 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 — 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 Contributions can be withdrawn by you or by the student tax-free.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. A variety of investment options
You can choose investments that best suit your investment objectives, risk tolerance, and time horizon. Different providers offer different investment options. Examples: stocks, bonds, mutual funds, 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 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 creditTax credit The amount you can deduct from your income when you file your taxes. This lowers the tax that you owe.+ read full definition can stay open for up to 40 years.
4 key points
- Government contributions
- Tax-freeTax-free Money that you do not pay tax on.+ read full definition compoundingCompounding A way to grow your money faster. Instead of spending the money you make investing, you reinvest it so it can grow.+ read full definition
- Payments taxable in the student’s hands
- Variety of investment optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition
Caution
You have 60 days after signing your contractContract A binding written or verbal agreement that can be enforced by law.+ read full definition to cancel plans provided by scholarship planScholarship plan A type of Registered Education Savings Plan (RESP) that pools together the money of many investors. An investment manager invests the money for you, often in lower-risk, fixed-income investments such as bonds and GICs. Enrolment fees are often high and there may be strict rules.+ read full definition dealers without any penalty. Be sure to read and understand the rules outlined in the short Plan Summary provided in the plan prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition.