The world we live in today is constantly evolving with change around every corner. With the growth of industries, the demand for an educated workforce has drastically increased. That being said, the importance of education in the present-day scenario is undisputable. One of the primary goals of parents is to save for their child’s education. Education can be expensive and sometimes out of the reach of some people. To help parents save for their child’s post-secondary education, The Canadian government brought about the Registered Education Savings Plan (RESP).
What is RESP?
Registered Education Savings Plan or the RESP is one of the most well-known savings and investment plans in Canada for parents looking to save for the post-secondary education of their children. RESP works as a growth-oriented form of investment that also has a tax shelter. The government-provided grant also acts as a massive incentive for parents to spend on their children. The plan works by either the parents or guardian of the child to make a contribution to the RESP account, the Government provides 20% ( of the first $2,500 as an investment, per year ) returns on this contribution enabling steady growth of the invested funds. With this plan, parents can gather up to $500 every year on their investments. The returns that parents will accrue are known as the Canadian Education Savings Grant or CESG and will form part of the RESP. The Grant has a maximum limit of $7,200 and while there can be any number of RESPs per child, their combined contribution should not be more than $50,000.
Since its introduction, the RESP has played a key role in enabling parents across Canada to save for the education of their children and has been instrumental in facilitating education and securing children’s prospects. Considering having an RESP for your child? Continue reading this article to know the top 8 reasons why you should consider opening an RESP now.
1. Tax Savings
Tax is levied on most forms of investment, however, in addition to being a very reliable form of investment to further secondary education for your children, RESP offers a tax shelter investment as money grows tax-free. RESP attracts a 0% tax levy thereby allowing your investment to grow organically. No tax levy applies unless the funds are taken out to pay for the child’s education. It is to be noted that the money that the government pays out, is taxed, however since most students do not have any form of income at that stage, a tax refund can be initiated. Contributions made into RESP are returned back to investors tax-free but a contributor’s earnings from the plan may be taxed.
2. Educational Assistance Payments (EAP’S) Can Be Taxed In The Hands Of The Students
Once your child is enrolled in higher education or post-secondary education, they may take pay-outs for the education from the RESP in the form of something known as Educational Assistance Payments or EAP’s. These EAP’s are comprised of the investment made to the RESP by the parents and the grants obtained by the government. This allows for payment of tuition fees in the hands of your child. EAP’s are not clubbed with the income of the parents and are taxed solely in the hands of the students. Considering that most students of that age do not fall under the category of income earners or do not possess any source of income, the overall tax liability on them is minimal as opposed to what it would have been in the hands of the parents. Therefore, EAPs from RESP are great tools to enable students to pay for secondary education without attracting high tax liability.
3. RESPS Provide Long Term Options
It is a commonly known fact that long-term investments are better suited for long-term goals. RESPs can stay open for 36 years allowing parents the option of starting to save from a very early stage. An RESP is also conducive to children choosing to defy their education to a later stage. If your child plans to put on hold their educational plans after high school and revisit it at a later stage of life, the RESP provides families with this flexibility. However, if your child is planning to take a gap after high school and continue their education at a later stage, it is best to verify whether there are restrictions on your RESP. If your child is planning to continue their Higher education in Canada, then an RESP can prove to be extremely beneficial for you.
4. RESP Offers A Variety Of Investment Options
One of the biggest advantages that an RESP offers is the versatility in terms of investment options available for your fund. Anyone investing in an RESP is not bound to any one fixed form of investment and can choose between several options available. Hence, RESP grants investors a great deal of flexibility & choice. It allows you to pick your desired form of investment in the form of Bonds, GICs, Mutual Funds, stocks, or ETFs, based on an assessment of several factors which include risk, return, long duration, and so on. By offering investors such a wide variety of options, RESP seems like one of the most appealing Canadian educational Savings options.
5. Includes Government Grants
Another major advantage of the RESP is the fact that it also attracts Government Grants in Canada. When parents contribute to the RESP, the federal government adds to the contribution in the form of the Canada Education Savings Grant (CESG) which is 20% on contribution & can be a maximum of $500 worth of grants each year. The government offers Additional Canada Education Savings Grant (ACESG), Canada Learning Bonds (CLB) to target middle and lower-income families offering higher rates of returns, and an additional grant towards the fulfillment of secondary education.
6. RESP Offers Flexibility
Apart from the versatility of investment options, RESP extends beyond just payment for tuition fees. RESP offers a great deal of flexibility in terms of expenditure. RESP applies to all forms of associated expenses to secondary education including housing, books, and so on. RESP unlike several funds designated to education offers a comprehensive solution to providing for secondary education. RESP, therefore, makes for one of the most attractive educational investment options for students looking to pursue their secondary education in Canada.
7. Family RESP Plan
The advantage of opting for a family RESP is that anyone who is related to you can receive the savings, be it children, stepchildren, grandchildren, nieces, nephews, or even by your siblings thereby ensuring that you don’t have to withdraw the money by paying excessive taxes or end up returning the grant to the government if the beneficiary cannot or chooses not to pursue post-secondary education.
8. More focus on education
While students do have the option of working while pursuing their studies, it does take away from the time that is available to them. Particularly in competitive programs and universities, students are under constant pressure to perform academically and also in extracurricular and co-curricular activities. This can be demanding, especially if the child is pursuing a rigorous degree in a short period of time. An RESP allows the student to focus on academics and sports and other interests without having to worry about finances or balancing their jobs with college work. The burden of student debt has been well documented and has repercussions that can last a lifetime. An RESP alleviates those problems completely.
It is to be noted that there are penalties involved in case of default of putting to use the RESP correctly. If the RESP is found not to be used in furtherance of the education of the child, then there may be penalties involved and income tax liabilities. Make sure to verify that your RESP plan includes the course that your child wishes to pursue.
As a great tool to help students pursue their secondary education while assisting parents/guardians through this process, RESP is one of the best investment options in Canada offering a multitude of benefits. RESP allows parents to start saving up for their children’s education right from birth and gives subscribers the opportunity to make contributions that lead to tax-free earnings for the beneficiary. However, RESPs come with their own set of risks and it is advisable to take the time and effort to look at all available plans and investment options before locking in on any single one, as this is a long-term venture that has numerous benefits, if used the right way.