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Why invest in an RESP?
An RESP or Registered Education Savings Plan is a tax-advantaged account that can help you save money for a child's post-secondary education. Here are a few reasons why you may want to consider contributing to an RESP.
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1. Tax-free compounding
Compound interest can be defined as the addition of interest to the principal sum of a deposit. It is the result of reinvesting any interest earned. Think of compounding as multiplying your money. The interest-based income payments you receive grow each year because the base investment amount is growing each year. Simply put, compound interest can help ensure that your wealth grows faster.
When it comes to RESP accounts, all interest payments, capital gains and dividends within the account are tax exempt. This essentially means that you benefit from being able to keep all the money earned within the account.
While the EAP or Educational Assistance Payment is taxable, students generally have negligible income making their tax liability almost zero. You can further extend your earning potential by choosing a self-directed RESP account. This gives you the flexibility to hold multiple investments, such as mutual funds and Guaranteed Investment Certificates (GICs), within a single account.
2. Government Grants
Any and all deposits made by you into the account are automatically considered for all eligible grants.
- Canada Education Savings Grant (CESG)
Through this grant, the Canadian government contributes a sum of money to an RESP. For a beneficiary to receive the CESG, personal contributions must be made to an RESP. These funds can be used to pay the cost of a child's education. This can include full-time and part-time post-secondary education at colleges, universities, trade schools or apprenticeship programs. The lifetime maximum CESG amount per beneficiary is $7,200. If you are unable to make contributions in a given year, the government allows you to catch up in future years.
- Additional Canada Education Savings Grant (A-CESG)
For middle-and low-income families, the government offers an additional amount of CESG, known as the A-CESG. For eligible families, it could mean an extra 10% or 20% which gets added to the first $500 contributed to an RESP each year.
The Additional amount of CESG may be:
- up to $100 if the last financial year's adjusted income is $50,197 or less ($500 x 20% = $100)
- up to $50 if the last financial year's adjusted income is greater than $50,197 and up to $100,392 ($500 x 10% = $50)
- Canada Learning Bond
The CLB or Canada Learning Bond refers to the funds that the government adds to an RESP for children from low-income families. You do not have to make any personal contributions to an RESP in order to receive the CLB.
The Government of Canada contributes up to $2,000 to an RESP for an eligible child. This includes:
$500 for the first year of eligibility
$100 each year the child continues to be eligible (up to and including the benefit year in which they turn 15)
- Provincial Education Savings Program
Certain provinces may add funds to an RESP under the Provincial Education Savings program. Quebec, for example, offers the Quebec Education Savings Incentive. While Saskatchewan offers the Saskatchewan Advantage Grant for Education Savings. And residents of British Columbia can take advantage of the BC Training and Education Savings Grant. This is usually separate from any money offered by the Canada Education Savings Grant (CESG), the Additional Canada Education Savings Grant (A-CESG) or the Canada Learning Bond (CLB).
Please note, not all government grants are available in all types of RESP accounts. For more information, please visit Canada Revenue Agency website or consult your RESP provider to determine the offering.
3. Carry forward your contribution
If you do not receive the entire grant amount each year, any unused grant room accumulates and carries forward until the beneficiary turns 17. However, you can only use the contribution room of the previous year each time – this allows you to benefit from the full government grant amount even if you do happen to miss your contribution targets at any point.
The carry-forward option allows you to take advantage of the CESG even if you've delayed investing in an RESP or have been unable to make the required contributions to receive the maximum grant amount each year. With the carry-forward option, you can contribute more toward the current year by using contribution room left over from a previous year. However, you’re only allowed to use unused contribution room from one previous year. For example, if you’re contributing in 2022, you will be able to use any unused contribution room from 2021, but you won't be able to use the combined unused contribution room from 2021 and 2020.
However, to be eligible for the grant money, you should open an RESP before your child turns 15 and ensure that you've met the required minimum contribution levels.
4. Nearly everyone can contribute
Once an RESP has been opened, parents, grandparents, extended family and even friends can contribute to it. In this case, the money will be pooled together. Different parties can also open their own plans. However, the maximum limit is per beneficiary, so all active plans will be taken into consideration. Plus, the beneficiary can contribute to their own RESP as well and invest the earnings from a summer job or birthday money. With all these options, you may find that reaching your RESP goals is actually quite easy.
5. Flexibility built-in
As long as you stay below the lifetime contribution limit of $50,000 per child, the contribution amount is totally up to you. An RESP can be kept open for up to 35 years and the funds do not need to be used right after high school. Besides paying tuition, the money can also be used to cover education related expenses such as housing and transportation. Funds from an RESP can even be directed toward non-traditional options such as practical education or trades training. Plus, you have the option of transferring the account to a sibling.
On a final note
As a parent, an RESP can help you invest in your child's future. RESPs also set a good example for your kids as they demonstrate the importance and value of education. If you want to take advantage of all the benefits these regulated accounts offer, consider investing in an RESP.
The information contained herein has been provided by TD Direct Investing and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
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