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RESP 101 – What is it, and How it Works?


The vertiginous rise in the education cost every passing year has been a significant cause of concern. Instead of letting it bog down your plans regarding how you want your child’s future to shape, you need to be proactive and find ways to meet adversity in a more prepared manner.

One of the best ways to do so is by investing in a government-registered savings plan. These are specially curated for parents looking to safeguard their child’s future by allowing them to undertake post-secondary education in the country. Yes, we are talking of the RESP also knows as the Registered Education Savings Plan.

This article discusses RESP and how it works.  

What is an RESP?

A Registered Education Savings Plan (RESP) is a savings account with a twist. It is government-sponsored and encourages savings for post-secondary child education. These are tax-advantaged funds that offer free government grants and compounding advantages.

How do RESPs work?

In an RESP, both the account holder and the government (as grants) contribute towards the funds and then invest towards profitable instruments. The returns are exempt from tax until you withdraw them. It allows the fund to grow enough to compensate towards higher secondary education with minimum further debt.

The funds cap the maximum amount at $50,000 for every child. A significant benefit of such an investment is the government influx via the Canada Education Savings Grant (CESG). It provides a maximum of 20% of your contribution, subject to a maximum of $500 per annum.

How to open an RESP account?

The subscriber of an RESP account can be anyone. He can be a parent, grandparent, family friend, relative, or someone you met on your last train ride. They need to be a Canadian resident and possess a Social Insurance Number (SIN).

You can purchase an RESP account through a scholarship plan dealer or any financial institution such as a credit union or bank. The former specializes in administering the fund, and they take care of all the investment decisions which the other options do not offer.

Types of RESPs

We can divide RESPs into three types –

  • Individual RESP – There is only one beneficiary associated with the plan.
  • Family RESP – It comes with a multiple beneficiary option. The holder can also choose to share the proceeds amongst all the beneficiaries.
  • Group RESP – A firm offering a group scholarship plan accepts contributions from a pool of investors. It undertakes a conservative investment approach to ensure the safety of funds.

Withdrawal facility

The RESP works like a pension scheme once you enroll your child in a qualifying post-secondary education or training. These inflows are referred to as EAPs (Educational Assistance Payments) and will be claimed by the child as income on their tax return for the year.

Suppose your child wishes not to pursue post-secondary education you can transfer the plan to any other eligible child, withdraw the funds (post-tax cut on interest), or transfer a maximum of $50,000 to an RRSP (Registered Retirement Savings Plan) account.

The Bullish takeaway

Education, especially post-secondary, can cost a lot of money. To free you of the financial burden, you can set up an RESP account. You must take steps in advance to ensure that you secure a bright future for your child. 

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