You’ve decided that you want to help your child save towards their post-secondary education, but you’re not sure how. Should you save the money in an RESP or a generic savings account?
Let’s discuss the unique features of an RESP and how they work.
When you contribute money to your child’s RESP, you’re eligible for a government grant.
Known as the “Canada Education Savings Grant,” your child is eligible for up to $500 in government grants per year when you contribute at least $2,500 annually. That works out to the equivalent of 20 per cent in extra money for every dollar contributed to your child’s RESP.
If you contribute the full $2,500 every year, your child will be eligible for a lifetime capacity of $7,200 in Canada Education Savings Grants.
The Canada Education Savings Grant is the equivalent of free money. As long as you contribute to your child’s RESP and your child goes to college or university, your child will be able to access and benefit from the grant money.
If your child decides not to go to college or university for any reason, the worst that can happen is that you’ll need to return the grant money. You have nothing to lose.
If you’re a lower income family, you may be eligible for more “free money.” There’s also the Canada Learning Bond that you may be eligible for just for opening and contributing to an RESP.
This compares to a generic savings account where you aren’t eligible for any sort of grant, even if you’re saving towards your child’s education in it. This is all the more reason to open an RESP.
Unlike generic savings accounts, you don’t have to pay income tax on the growth of your money in your RESP. This helps your child’s educations savings grow much faster. Your child will benefit from compound interest over time.
As long as the money stays in your child’s RESP account, you won’t have any pay any income tax on it. It’s as simple as that.
When the money is eventually withdrawn from your RESP, the growth is taxed in the hands of your child, not you, even though you set up the RESP for your child.
This differs from a generic savings account.
With a generic savings account, the money is taxed based on your income. Since you almost certainly earn a higher income than your child, you may have to pay a lot more taxes, which leaves your child with less money to spend on their education.
Not so with RESPs. Your child may pay little to no income tax on the RESP growth, leaving your child with even more money to fund their education.
If you don’t already have one open for your child, what are you waiting for? Open an RESP for your child today, on your way to providing your child with a brighter future.