Contributing to an RESP
Let’s hash out the popular RESP (Registered Education Savings Plan).
In Canada, this is quite an attractive way to save for your children or grandchildren’s post-secondary education.
There are a number of different factors to consider.
Do your initial investment dollars go directly towards your RESP or do they not? Let’s tackle a few of those questions right now.
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In this scenario, let’s pretend that you have just had your first child. You’re now in a position to invest in an RESP or you may have received a letter in the mail that says you are eligible for a grant.
The government is essentially encouraging you to begin putting money aside for future education costs.
Ideally, you could open an RESP Family Plan account, whether you have one, two, three children or more.
An RESP Family Plan offers each individual child the opportunity to use the grant monies from any member on the family plan (such as siblings).
It’s a huge advantage!
There is very little to possibly no risk when considering the RESP Family Plan. .
RESP Contribution Rules
Should you contribute to your RESP, your RRSP or to your TFSA?
Before diving in further and moving forward with an investment firm to open an RESP, let’s review the RESP contribution rules.
For each child, you can contribute up to $2,500 per year and the government will match this at 20% or up to $500 in grants per year. As an example, if I contribute $2,500 to my child’s RESP, the government will add in $500 of grants per year, and now the account is at $3,000.
If you missed a few years early on, you can catch up (maximum $1000 in grants per year). You can only do one year of catch-up per year. So, in theory if you had a nine-year-old and you never contributed to their RESP, you could only double contribute for up to nine years (until the child is 18 years old).
Avoid RESP over contributions
There are maximums as to how much in government grants you can receive in your lifetime. The RESP contribution limit would only fund a total maximum of $7,200 of grants per beneficiary, if contributions were made accordingly. There are also maximums as to how much you can withdraw from the RESP before one of your children are eligible to withdraw from the RESP (18 years old).
There are a number of rules with respect to how taxation works.
The concept of the government’s plan is to shelter all investment growth and income until withdrawn for post-secondary purposes.
The beneficiary child would receive the taxable income equivalent to the grant and income withdrawn from the plan. The original contributions are not taxable when withdrawn.
Generally, the beneficiaries will have significantly less income than their parents when in school and should pay little to no tax when the withdrawals take place.
Now, are you better off investing funds in the RESP or the RRSP?
If you choose to contribute to your RRSP, you will receive a tax credit for the funds deposited and allow for tax deferred growth. However, the funds are then taxed to your hands when withdrawn.
If you choose to invest through RESP contributions, you will not receive a tax credit, but you will get an instant boost of 20% from grants, if contribution rules were followed. Then, only a portion of the withdrawal is taxed to your beneficiary and not to yourself when withdrawn for education purposes.
The liquidity is almost the same in both. However, if you want maximum liquidity and more choices as to how you should use the funds later, a TFSA could be the best option.
Not everyone is in the same situation. Everyone has different needs, goals, income, etc.
Talk to your investment advisor to determine what strategy is most applicable for you.
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You want to get this right. Ideally, you want to take advantage of the government’s free grant money, provided you’re not hurting your own personal cash flow.
Bottom line, if you have non-registered assets that are sitting there accumulating dust and gaining little to no income, then it makes sense to put them in an RESP.
RESP Calculator Link: