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RESPs Benefit from free money – and more

Registered Retirement Savings Plans (RRSPs) get a lot of great press as a result of being an effective way to save for retirement. Less talked about but also very important are Registered Education Savings Plans (RESPs) – a great way to save for your child’s education.

Although the money you (and any other contributors) put into an RESP can’t be deducted from income on your tax return the way RRSP contributions can, any gains (capital gains, dividends, interest income, etc.) are tax deferred until savings are removed from the RESP. At that time, it’s also taxable in the hands of the student, who is likely at a much lower tax bracket than the contributor.

One of greatest benefits of RESPs is the Canada Education Savings Grant (CESG): free money that the Government of Canada contributes toward your child’s post-secondary education. The amount of CESG varies according to your family’s income, where you live and the amount contributed to the RESP in any given year. 

If you think the government is offering a small amount of money, think again. The maximum CESG amount in 2013 was $500 with a lifetime maximum amount of $7,200. Over the years, that can grow tax free and become a considerable amount to go towards tuition and other uses.

There is no better time than the present
You can start contributing to an RESP almost the day your child is born (all you need is the child’s name and a social insurance number), and the earlier you start to save, the earlier your contributions – and the government’s – can start to grow tax-free. That said, it’s never too late to start saving in an effort to reduce the financial impact of your children’s post-secondary education.

RESPs: Quick questions
Q. Who can contribute?
A. Almost anyone who wants to help put a child through school can contribute within the limits.

Q. What kind of post-secondary education can the money go towards?
A. RESP savings can be used to fund almost any type of post-secondary education.

Q. What happens if my child chooses not to pursue a post-secondary education?
A. Money can be transferred tax-free to another RESP or an RRSP. Or, money can be withdrawn from the RESP and be subject to tax. Many people choose to keep the RESP open (for up to 36 months) before making any decisions, in case the child decides to pursue a post-secondary education at a later date.


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