The Registered Education Savings Plan (RESPs) is a regulated tax-free savings account that can be effectively used to save money for your child’s post-secondary education of any nature viz. university, college or vocational school.
Recognizing the importance of higher education for children, the government generously allocates funds to support parents in this endeavour through the Canadian Education Savings Grant (CESG) wherein it matches 20% of the money that parents deposit into an RESP for their child. As the intent is to help everybody irrespective of their socioeconomic background, the government has gone a step further and helps low-income families through Canada Learning Bond. Through this, the government deposits up to $2,000 in your Child’s RESP in gradual installments over the period of 16 years- $500 in the first year and $100 annually for the next 15 years. But ironically in 2018 alone, $4 billion of federal funds allocated to the CLB went unclaimed because an estimated 1.8 million children weren’t signed up to collect the benefit.
The worth of this unique Savings Initiative of the government is highly appreciable; yet the facts/ statistics indicate that enough qualified people do not take full advantage of this wonderful plan.
This is probably due to the fact that people are either ignorant of the higher costs of post secondary education, or don’t have a clear idea about the application process of an RESP. As per Statistics Canada, the average cost of 1 year of undergraduate tuition in Canada nearly tripled from $2,333 to $6,191 between 1995 and 2015. As these costs can seem unaffordable for many people later, to ensure that their children get quality education and proper training for their career, parents need to start investing for their kids’ post secondary education at an early stage.
Now, as we have seen that the government makes a contribution to help you save for your child’s education, some people tend to believe that it is simply a way to get ‘free money’ from the government. But is this the only reason why you should feel motivated to invest in RESP? Certainly not! RESP is not only a way to get free funds from the government; it has numerous additional advantages that are quite appealing as discussed below:
1. Your savings grow tax-free The greatest feature of an RESP account is its tax-free advantage. The government doesn’t charge any tax on the investment earnings (as long as they remain in the plan). Furthermore, when your child needs to withdraw the money for his/ her post secondary education, the contributions you made are withdrawn tax-free as well. Though the portion of government grants and capital gains withdrawn as Educational Assistance Payments (EAPs) are taxable, since they are taxed in your child’s hands who is a student, the taxable amount is negligible.
2. Number of investment options available The RESP funds can be invested in a number of funds such as stocks, bonds, mutual funds and GICs. While some plans let you decide how to invest your savings, others invest your money for you.
3. Help for low-income families To help people from low income families, the government provides additional grants. If your household’s net income is less than $98,040 (2021), you qualify for the additional Canada Education Savings Grant (CESG). Also as discussed above, if you are unable to invest for your child’s education due to low income, the government helps you through a unique resource called the ‘Canada Learning Bond’ (CLB) that was introduced in 2004. You are not required to make any contribution at all. The government will deposit up to $2000 in your child’s RESP in gradual installments over the period of 16 years- $500 in the first year and $100 annually for the next 15 years. But that doesn’t imply that late registrants will get less benefit. You can claim CESG retroactively if you started the RESP later and missed the first few years of grants.
4. Different options available in case your child doesn’t opt for post-secondary education If your child doesn’t intend to attend college/university, you can keep the account open for up to 36 years. Moreover, you can transfer the money to another child (for Family RESP plans) though the $ 7,200 lifetime grant limit still applies. Not only that, you can withdraw your original contribution to the RESP tax-free or can transfer up to $50,000 to your RRSP (though for this, the child must be over the age of 21 and the RESP must have been open for at least 10 years having room for contribution).
5. Sets a good example for your children RESP also sets a great example for your kids as it can teach them about the value and importance of education so that they may make sustained and dedicated efforts to get higher education. As we have seen, RESP is not only a way to get ‘free money’ from the government. It is a great tool to save for your child’s post-secondary education offering you a tax free growth, plenty of investment options, assistance for low-income groups, flexibility of usage and educational value for children.
As an independent Insurance Advisor working through Punjab Insurance Agency, I deal with different insurance companies offering plans for different types of insurance. I can explain to you in detail the insurance plan options and coverage that are suitable for your needs and resources. Besides, I can also help you to purchase Mortgage Insurance, Super Visa Insurance, Disability Insurance, Critical Illness Insurance, Extended Medical Plans, Group Medical Plans, RESP, RRSP, Travel Insurance, TFSA accounts, Health & Dental plans along with Estate Planning suitable for your needs and resources.
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