Why contributing to an RESP is a smart money move this tax season

It is tax season again, and many of us are scrambling to get all of our paperwork together to meet the filing deadline. In the rush of the moment, while you’re thinking about your household finances, don’t miss out on a valuable opportunity to grow your child’s education savings- tax free in a Registered Education Savings Plan (RESP).

Putting money into an RESP not only helps build a reliable fund for your child’s future education, it offers numerous ways to earn significant financial rewards.  It’s never too early to get started. The earlier in your child’s life you start contributing to an RESP, the greater your benefits will be.

Your RESP savings grow tax free

This is because one of the most important benefits of an RESP is that all of the interest or other earnings your investment makes are tax free until the money is withdrawn. You can choose investments that best suit your goals, risk tolerance, and timeline. Different providers offer a variety of investment options such as stocks, bonds, ETFs, mutual funds, or GICs.

If you can afford it, you can get the most benefits of this compounding by contributing the maximum lifetime limit of $50,000 per child.

Furthermore, even when the funds are withdrawn from the RESP, they are taxed as income for the beneficiary, the student. As most students have little or no other income, they can usually withdraw the money without having to pay little to no taxes at all.

Government grants

The other main benefit of putting your money in an RESP is the money that the government will also contribute to your child’s savings. This is called the Canada Education Savings Grant (CESG), and the federal government will match 20% of your investment, up to $500.00 annually to a lifetime maximum of $7,200.

Children of low-income families can also be eligible for the Canada Learning Bond (CLB) of up to an additional $2,000 – $500 in the first year of eligibility and then $100 for each year the family qualifies until the child turns 15. (In addition, several provinces also offer grants as an extra incentive for saving towards a child’s post-secondary education.)

So, your contributions will most likely grow by 20% right from the start, and the earnings on your contributions and government grants will grow, tax-free, until your child is ready to use it for their post-secondary education. There’s no rush to cash in right after high school, either. An RESP can stay open for 36 years, meaning your child can graduate and defer their educational choices for a few years until they are ready to go back to school.

Plus, the RESP can be used to pay for more than just tuition. So long as the beneficiary is registered in an eligible educational institution, they can use the funds to cover books, accommodation, travel, and other needs a student may have.

It’s smart money management to plan for future expenses today. You can earn tax-deferred income on your investment, access government grants, and eventually withdraw the funds at the little-to-no tax student bracket. You will also avoid the need to struggle or go into debt in order to help your child attend their dream school when the time comes.

While financial planning is top of mind this tax season, it is a good idea to consider taking advantage of all the benefits that come from investing in an RESP for your child’s education.

Peter Harris

Peter Harris is a marketing, branding, and careers expert. He began his career as a travel writer and advertising copy writer, and went on to build the original Canadian content for Monster.ca, serve as the editor-in-chief of Workopolis, and deliver the country its daily news and features as the homepage editor of Yahoo! Canada. He writes and speaks frequently on career, workplace, education, and technology issues as well as on trends and changes in the Canadian job market. He is the co-founder of Yackler, a content marketing start-up, and the father of a challenging, funny, elementary school-aged son.

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