For nearly 40 years Canadians have had the opportunity to save for their children in a government-supported education savings account. The Registered Education Savings Plan (RESP) also offers the opportunity to benefit from government grants to boost the savings. This is something that makes it an attractive investment options for parents.
However, there are a few different options and rules that can seem confusing to a mom or dad who simply wants to stash money away for their child’s future.
Here is a basic breakdown of RESPs and how they work.
While it is usually parents who open up RESPs, they can be opened by anyone, including grandparents or other relatives. The person who makes the contributions is considered the subscriber.
RESP are tax-sheltered accounts, meaning you don’t need to pay tax on the interest it earns but contributions made to the account are not tax deductible. You cannot claim your contributions on your tax return. They consist of a variety of investments from stocks to GICs (mutual funds, bonds, etc)
One of the most attractive elements to RESPs are the grant opportunities. Federal and provincial grants are largely dependant upon contributions made by the subscriber. The Canadian Education Savings Grant is worth 20 percent of each dollar invested.
Depending on where you live there may also be provincial grants to help you in the savings process.
In addition, for low-income families, the Canadian Learning Bond adds money to the account independent of contributions. Accounts will see $500 in the first year and $100 each year after that until the child turns 15 years old.
Because of the nature of the investment, insurance can also be purchased to protect your child’s future. These options can include coverage in the case of illness, accident or even death.
The benefits of investing in an RESP include reducing the amount of student loan debt that a child may need in incur. As well, many students still rely on family support through the process and having some money put aside helps reduce that burden.
Well, most reports indicate that education costs will be thousands of dollars, an excerpt from the Globe and Mail says it not likely to be that for most parents.
When a child starts college they can make withdrawals from the account, which are called either Education Assistance Payments (EAP) or contributions. EAP refers to the interest earned and needs to be claimed on their taxes. However, the contribution portion does not need to be claimed as income, CRA’s website states.
Although most children will use the account within a few years of turning 18, the Ontario Securities Commission states that an RESP can stay open for 36 years.