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5 Reasons to Start an RESP

By Navid Boostani | August 4, 2017

In today’s knowledge-driven world, a post-secondary education is more important than ever. But because of increasing tuition costs, many students need their family’s support to pay for a college education. To help families save for their children’s post-secondary education, the government of Canada introduced the Registered Education Savings Plan (RESP) back in 1972. RESPs have evolved substantially since then and have become the best vehicle for Canadian families to save for their children’s education.

Here are 5 reasons to open an RESP if you haven’t already:

Government grants mean free money!

The federal government puts in 20 cents for every dollar you contribute to an RESP – up to $500 per year – under a program called the Canada Education Savings Grant (CESG). That is a guaranteed 20% return on your first $2,500 of RESP savings per year.

Total government contributions under the CESG currently max out at $7,200 per child.

Choice of investment options

Similar to RRSPs and TFSAs, you have access to a number of different investment options inside an RESP. These include stocks, bonds, mutual funds, ETFs, and GICs.

Your money grows tax-free

Similar to an RRSP, interest or capital gains earned inside an RESP are not subject to taxes until withdrawn. That means your money grows faster because you get the full benefit of compound growth over many years.

RESP withdrawals are taxed in the student hands

When your child enrolls in a post-secondary education program, you can start withdrawing funds from an RESP. Withdrawals of your original contributions are considered a refund and are tax-free. Government grants and any interest and capital gains earned inside the RESP are taxed in the student’s hands in the year they are withdrawn.

Since students usually have low or no other income, taxes on RESP withdrawals are typically zero or negligible.

Friends and family can contribute

Grandparents, aunts, uncles, and even friends can open an RESP for your children and contribute to it. In fact, RESP contributions are quite common as a birthday gift from family members.

Are you interested in opening an RESP for your child? Open an account online with ModernAdvisor today!

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Navid Boostani

Navid Boostani

Navid is a co-founder and CEO of ModernAdvisor. He is a problem-solver and is passionate about bringing affordable and unbiased investment management to all Canadians.