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RESP 101: How to secure your Child’s Future

Saving money for your children’s education is the best thing you can do right now. Higher education has become an essential investment for students and is a means to secure one’s future.

However, education is expensive and students often have to take an education loan which means they are in a pile of debt before they even receive their first paycheck.  The average debt per student is around $30,000 while Canadian students owed close to $28 billion in total debt, according to a National Observer report published last year. 

However, in order to help you save towards your child’s education, the Canadian Government gives you a brilliant option via the RESP. 

What is an RESP?

RESP stands for Registered Education Savings Plan. This account is sponsored by the Canadian government and it encourages you to invest in your child’s post-secondary education. 

Contributions in your RESP account builds up as tax-free earnings. In addition to the parental contributions, the government contributes a certain amount for children under the age of 18 and only the contributor can contribute and withdraw money from an RESP.

According to Investopedia, an RESP lets parents in Canada begin saving for their children’s education at birth, with the government pitching in for part of the tab. You can open an RESP account through banks, credit unions, or other financial institutions. 

Anyone can contribute to this account, whether it’s a mom, dad, or a favorite uncle or aunt. The extra fund the government deposits is called the Canadian Education and Savings Grant and is provided based on the family income. 

Once in college, the child receives EAPs (educational assistance payments) which is considered as the student’s income. In case your child doesn’t want to pursue further education, the contributor will receive the amount in the RESP back absolutely tax-free. 

You have a lifetime limit to contribute up to $50,000 per beneficiary to an RESP. If your child doesn’t pursue education within 36 years of opening an account, the government can ask the additional grant back. 

Further, if you use your RESP money for other than educational purposes, you have to pay a 20% penalty and an income tax too. So, it is best to know all about RESPs before rushing in to allocate funds here.

Types of RESP

There are three types of RESP and you can choose the appropriate type for contributions.  According to WealthSimple, an individual RESP can be owned by anyone, including a parent, a grandparent, a stranger, or even by you.  

RESP contributions are also for adults, which means you can also save for your own education via this plan. You usually don’t need to make a minimum deposit and if you decide to not pursue an education, you can name another beneficiary for your account.

In a family RESP, you can have one or more beneficiaries but they have to be related to the parent (or formally adopted) and should be under the age of 21 when they are added to the plan.  You don’t need to make a deposit when you open the plan. 

If one beneficiary decides to not study further, the other beneficiary can still use the money in the account and you get to decide how you want the funds to be distributed among the beneficiaries. 

A group RESP works a little differently than the other ones. You can open a group plan for one beneficiary and you don’t have to be related to the child. You have to make a minimum deposit when you open the account. 

The amount you contribute is pooled with different investors and the amount your child will get depends on how much money is there in the account. Group RESPs generally have more rules and regulations than individual and family RESP so it is important that you are aware of all the rules before you open an account.

Benefits of an RESP

The RESP is a tax-advantaged account, meaning any and all gains within the account won’t be subject to any income or capital gains taxes as long as the money is in the account. 

After it is withdrawn and used as an approved education expense, investment gains will be subject to taxes but since students generally have minimal income (if any), they have to pay very little or no taxes. 

Another major advantage of an RESP is the Canadian Education Savings Grant (CESG). The CESG is a program in which the Government of Canada will help you with special savings incentives. 

You get 20% of your annual contributions or a maximum of $500 in respect of each beneficiary and a lifetime of $7,200. Children belonging to lower-income groups can also receive money from the Canada Learning Bond, where the government can add up to another $2,000 to a child’s account.

According to ModernAdvisor, there are certain benefits that you get depending on the type of RESP you choose to invest. In an individual RESP, contributions to the plan are not limited by the age of the beneficiary but by age of the plan. 

For example, if you open an RESP when your child turns five, you can continue to make contributions until they turn 36. This means that even an adult can make individual RESPs for themselves. 

The only drawback is you will not qualify for the grant, however, the contributions will be tax-sheltered. You can also convert your individual RESP into a family plan whenever you want to. 

The Bullish takeaway

Though RESP is a savings plan primarily for your child’s education, you can invest money in it through any manner of instruments like ETFs, GICs, mutual funds, stocks, bonds, etc. This widens the scope of profit as compared to other savings account.

RESPs are a great way to start investing in your child’s future. This account can create a major difference in the educational journey of your kid.

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