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RESPs offer a one-time 20% bonus - and much more

With children returning to school this month, it's a great time to consider how their post-secondary education will be funded in the future. Contributing to a Registered Education Savings Plan (RESP) is not only a great gift, but it also gets the federal government to chip in - providing up to $7,200 in free grants plus other significant tax benefits.

Early planning is required to maximize RESP benefits. Contributions to an RESP attract the 20% grant on the first $2,500 contributed each year (up to $500, or $1,000 if unused grant room is carried forward from a previous year). While RESPs can be opened for beneficiaries of any age, to attract the 20% grant, the beneficiary must be under 18. As well, to qualify for the grant at age 16 and 17, a minimum of $2,000 must have been contributed, or a minimum of $100 in annual contributions made in any four years before the child turns 16. Note that if the child does not end up going to a qualifying institution, the capital can always be taken back tax-free, although the grant money may have to be repaid if funds are withdrawn prematurely.

Multiple benefits
RESPs offer two other major tax benefits: tax-deferred growth and income splitting. Tax on all interest, dividends and realized capital gains earned within the plan is deferred until eventually withdrawn for education purposes. At that point, earnings are taxed in the hands of the beneficiary - likely at a low marginal tax rate, if at all. So RESPs provide the opportunity to shift the income you would normally pay tax on, for all those savings years, to a lower earner. In fact, the tax deferral and income-splitting opportunities are so favourable that making a large one-time contribution early in your child's life may create a larger pot of money by the time the child attends school, even without the grant. Example: at a 5% annual growth rate, $50,000 grows to $120,330 over 18 years.

The rules around RESPs are tricky. Our team can take you through them and help you evaluate your options, based on your family circumstances and a range of assumptions.


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