Canada Registered Education Savings Plan
RESP stands for a registered education savings plan. This plan is designed to help you save for your child’s education. RESPs can cover a wide range of investments so let’s take a deeper look into what a RESP is.
Registered education savings plans are investments that are “registered” as savings or investments specifically for the use of education. The Canadian government wants to encourage further education for the children of this country as incentives when you register your investment as RESPs the government gives you additional benefits to do so. Benefits such as
- CESG grant
- Low-income contribution room
Starting with the basics. When you contribute to a RESP the government of Canada could add additional funds to your investment. Both your contributions and the extra contribution known as the CESG grant can grow. This can significantly help you save for your child’s future. For every $2,500 you contribute per year the grant will add $500. This would give you in turn $3,000 to compound as opposed to only your $2,500.
As well as the CESG there are additional opportunities for low-income families. For a family with a total net income of less than $48,282, the CESG grant will pay another 20% over what they already contributed. This makes their contribution $600 as opposed to $500.
These numbers can significantly compound over the years making it a big reason for families to add to their RESPs.
However, they do not come without drawbacks. One of the biggest drawbacks comes when your child doesn’t decide to go to post-secondary school. In this case, all of the CESG grants will have to be paid back to the government. The money you contributed will come back to you tax-free as a return of capital. However, the growth in the account will be taxed as “accumulated income”. This means the growth will be taxed at your regular income tax level plus an additional 20%. This means RESPs are great if your child goes to school, but not great if they decide not to.