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RESP Guide: What it is & How it Works

As a Canadian parent, you’re aware of the importance of setting money aside for your child’s post-secondary education.  Although your child may be still an infant, you want to be proactive about saving money for their future and wish to research everything there is to know about registered education savings plans (RESPs).

Here to guide you are 5 things to know before opening your child’s RESP.

There are government incentives

Each year, the Canada Education Savings Grant (CESG) matches 20 percent of one’s RESP contributions to a maximum of $500 annually and a lifetime maximum of $7,200. That means if you want to receive the full grant amount of $500, you would need to invest $2,500 annually to your RESP. Although there’s no annual limit on how much you can put into your child’s RESP, there is a lifetime contribution limit of $50,000.

There are different types of RESPs

RESP providers like Children’s Education Funds CEFI offer different types of RESPs, each with features and benefits to meet various savings needs. CEFI offers group RESPs, which pool the contributions of all subscribers and invest them as a group that are shared equally on the investment income based on the number of units each subscriber in the group has purchased.   CEFI also offers individual plans which come with their own set of rules.

There are tax advantages

An RESP offers several tax advantages. The investment income earned on your principal grows tax-deferred within the plan.  Payments from the plan are taxable in your child’s name, so when your child starts receiving payments from the RESP, the money will be taxed at their income.  Most students have little to no income which means their tax bill will be minimal.

 Anyone can contribute

Anyone can make contributions to an RESP including parents, guardians, grandparents, aunts and uncles and even friends, which makes it easy to proactively save money.  Remember, you and your child must be residents of Canada with valid Social Insurance Numbers.

 They have long lifespans

In the event that your child decides to forgo college or university, all is not lost.  RESP accounts can remain open for 35 years, giving your students time to change their minds.  You may also have the option to transfer the money to another child. You can also choose to close your RESP; your contributions are yours to keep and you do not have to pay tax on the money.  However, you must return all remaining grants and bonds to the Government since this money can only be applied to post-secondary education costs.  You can withdraw your investment

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