5 Reasons Why an RESP Is Essential
In today’s world, post-secondary education is not only important but vital for a successful life. Unfortunately, with the ever-increasingcosts of living and the perpetual rising cost of university education, relying on savings alone might not be enough to put your child through college. As a Canadian citizen, it is important to educate yourself on the benefits of RESPs and read as many online reviews on Heritage RESP and other RESP providers to enable you to fund your child’s college dreams with ease.
Registered Education Savings Plans (RESPs) have been in existence since 1998. Here are a few reasons why RESPs are not only important but essential to your savings efforts.
- Grants! Grants! Grants!
The ability to receive government financial aid is by far the most lucrative benefit of using RESPs. By having an RESP account, you instantly become eligible to receive the Canadian Education Savings Grant (CESG). The grant is issued at a rate of 20% for sums of money below $2500. This means for every dollar deposited into the RESP, the government contributes 20 cents. This continues until a maximum grant of $500 is issued by the government for a given year. Parents can receive this grant in the RESP continuously until their child turns 17 and up to a maximum of $7,200. For this reason, parents are advised to open an RESP as soon as possible in order to maximize the aid offered.
Another form of grant RESP holders can benefit from is the Additional Canada Education Savings Grant (A-CESG). As the name implies, this aid is tied to the first grant but with a slight twist—it is meant to assist parents with low-net incomes only. Upon approval, an additional 10% or 20% is given for each dollar deposited into an RESP. This means, depending on the circumstances, an RESP account can receive 30% or 40% more for every dollar contributed from these two grants alone!
Low-income families are also eligible to receive benefits from the Canada Learning Bond (CLB). Unlike the first two, this grant is location sensitive. Only citizens living in Alberta, Quebec or Saskatchewan can apply.
- Tax-Free Savings!
RESP account holders can enjoy tax-sheltered savings provided they maintain the money in the RESP account. Zero deductions on interest, dividends and even capital gains means a faster accumulation of money.
There are two instances, however, when a tax is imposed.
(i) When carrying out a withdrawal.
When withdrawing a specified sum, the amount is considered to be the student’s income and as such a student tax rate is imposed.
(ii) When the collective amount in the RESP exceeds $50,000.
Any amount above this limit is taxed at a student-friendly tax rate.
- Investment Options
RESPs, unlike other savings platforms, offer a variety of investment options that can be used depending on one’s time horizon, risk tolerance, investment objectives or just preference. Not all RESP providers are equal. Depending on their policies, different providers may offer different investment and savings options. You can choose low-risk high-returns stock options, mutual funds, government bonds, and Guaranteed Investment Certificates (GIC) among others.
- Anyone Can Contribute
In a way, RESPs are glorified bank accounts. They do not have any restrictions on who can make a contribution. This is good news for the multitude of parents struggling under the enormous financial pressure of having to pay for college. They can get assistance from friends and family to grow savings faster. If you fall under this category, sharing your RESP account number with your friends and family to contribute to it instead of buying gifts will increase your savings cumulatively.
Also worth pointing out, in addition to the contribution, anyone in your extended family or friends can also set up an RESP account for your child.
- Long Savings Life
Parents and other guardians will be pleased to learn that RESP accounts can remain active for up to 36 years! If a child decides to postpone pursuing his higher education after high school, the money can still be maintained in the RESP until the child resumes studies. In some RESPs, some beneficiary accounts can stay open for up to 40 years! In most cases, this prolonged period is allowed only for beneficiaries who qualify for a disability tax credit.
Some RESPs, however, may have penalties for choosing to delay a post-secondary education. It is important to read the fine print on the various plans offered to ensure zero surprises.