If you want your child to have a bright future, you should start saving for their higher education as early as possible. Opening a Registered Education Savings Plan (RESP) account is one of the most effective ways to fund your child’s college education. Check out this comprehensive guide to find out how RESPs work and why you should start one.
How RESP Works
Image via Unsplash by mdesign85
The RESP is a government-supported savings plan designed to help Canadian citizens save money for their children’s post-secondary education. The person who opens the account doesn’t have to be the beneficiary’s parent. They can be the child’s grandparent, a family friend, a benevolent neighbor, anyone who wants to see the child succeed. As the subscriber, you’re expected to deposit money into your RESP account on an annual basis. However, if you fail to do so in any given year, you can make catch-up contributions in future years.
To take advantage of RESP, all you need to do is open an account, deposit money into it every year, apply for the available grants, and let compounding work its magic. The funds you deposit into your RESP aren’t subject to taxes until withdrawal. Nonetheless, you’re required to use them for educational purposes only. One of the most compelling reasons to start an RESP account is that it qualifies you for an annual government grant called Canada Education Savings Grant (CESG).
Different Types of RESPs
There are several different types of RESPs to suit different needs and goals, including:
- Individual RESP: An individual RESP account has only one beneficiary, making it suitable for single-child families.
- Family RESP: This type of plan allows you to name multiple beneficiaries in your family who can share the funds in your account.
- Group RESP: A group RESP plan pools together contributions from multiple subscribers and makes investments on their behalf.
Benefits of RESP
The RESP is one of Canada’s most popular education savings plans because it offers several great benefits. Here are a few reasons why you should open an RESP account:
- Tax benefits: The Canadian government offers the RESP as a tax-advantaged savings plan to encourage parents to save for their children’s higher education. Any gains within your account are exempt from capital gains or income tax as long as you don’t withdraw them.
- Access to CESG: As an RESP subscriber, you may be eligible for CESG, a government grant program that matches up to 20% of your yearly contributions. You can receive a maximum of $500 per year. Lower-income families may qualify for even more CESG money.
- Investments: You can invest funds in your RESP account in stocks, bonds, mutual funds, or other financial instruments to help you save faster.
How to Start an RESP
To open an RESP account, the first thing you need to do is look for a reputable RESP service provider. Once you’ve found the right provider, you only have to provide you and your beneficiary’s Social Insurance Numbers and fill out an application form.
With the government grant and compounding returns, your RESP account can grow into a sizable amount of savings. Participating in this program is a great way to ensure your child can complete their college education with little to no debt.