Amazing reasons to invest in the Registered Education Savings Plan (RESP) and the Registered Disability Savings Plan (RDSP)
by Meiz Majdoub
Registered Education Savings Plan (RESP): is a tax-sheltered plan that can help you save for a child’s post-secondary education. With the high cost of education, many parents, grandparents, other family and friends are recognizing the need to save well before the expenses become a reality. An RESP combines flexibility, tax-deferred investment growth and direct government assistance to help you reach your education savings goals for your children. The RESP can be any financial institution, bank, insurance company, mutual fund company, etc.
Ease Your Financial Worries- A Registered Education Savings Plan helps you avoid the burden of paying huge tuition fees for your child’s post-secondary education. It ensures that your household budget remains undisturbed when your child goes for higher education.
Who can contribute to an RESP– Anyone can open an RESP account for a child—parents, guardians, grandparents, other relatives or friends.
Tax Free– An RESP, is a tax sheltered savings plan. It means that growth is tax-free compounding while you are contributing. Since your children will be withdrawing the money later for tuition, they will receive it at a much lower tax rate than you because students have lower income and higher exemption.
Lesser burden for your kids– Funds from an RESP can reduce the amount of loan required by your child for his/her higher education. Lesser debt means lesser burden for your child. Many students work through their student life to repay students loans. An RESP may eliminate the need to take up a job while going through college. What gift could be more appropriate for your kids than an RESP.
Free money from the Government– The government provides up to 20 percent in Canadian Education Savings Grant (CESG) for the contributions you make to your RESP till the time the child turns 17. This grant is 20% of contributions to an annual maximum of $500 and up to a lifetime maximum of $7,200 per beneficiary. For families with lower income, it may even be up to 40 percent on the first $500 and 20 percent on the balance amount.
Tax Implications if child doesn’t pursue education– When you close an RESP without using it for your child’s education, the following will apply:
- Any Canada Education Savings Grantmoney must be returned. If a sibling has grant room available it may be used for his or her education.
- You will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in the plan as interest. It will be taxed at your regular income tax level.
A study conducted by Credo Consulting Inc, shows that Canadians who establish registered education savings plans for their children are setting their kids up for financial success later in life because there’s a direct correlation between having post-secondary education and wealth.
Registered Disability Savings Plan (RDSP): is a long-term savings plan to help Canadians with disabilities and their families save for the future. If you have an RDSP , you may also be eligible for grants and bonds to help with your long-term savings.
You can contribute as much or as little as you want in any given year, and you can continue to make contributions up until the end of the year in which the beneficiary turns 59. The maximum Lifetime contribution limit is $200,000.
Anyone can contribute to the RDSP provided they have written permission to do so, and there are no restrictions on what the money can be used for once it is withdrawn, as long as it’s used to help the beneficiary.
An RDSP is eligible for the Canada Disability Savings Grant (CDSG). The grant is net income tested as such, depending on the contributions, the CDSG can be anywhere from 100%-300% of the amount contributed up to a lifetime limit of $70.000. Grants will be paid into an RDSP up to the end of the year in which the beneficiary turns 49. See Chart Below
|Beneficiary’s Family Income||Matching Grant||Max Grant Payable Per Year|
|Less than or equal to $93,208||On first $500
Grant equivalent to 300% ($3 for every $1 of eligible contributions)
|On the next $1,000
Grant equivalent to 200% ($2 for every $1 of eligible contributions)
|Greater than $93,208 OR if no income information is available from CRA||On the first $1,000
Grant equivalent to 100% ($1 for every $1 of eligible contributions)
While RDSP contributions are not tax-deductible, income earned grows on a tax-deferred basis. When withdrawn, the funds are taxed as income. You may be eligible for government assistance in the form of grants and bonds.
Young parents should contribute to a childs RESP or RDSP as soon as possible to increase the potential compounded growth.
The Majdoub Group is very experienced in this area and welcome questions, enquiries and comments. We are here for you. Below are our coordinates.
Meiz Majdoub, B.Comm, CLU, CH.F.C.
141 Holland Avenue
Ottawa ON K1Y 0Y2