Everything you need to know about RESPs (Registered Education Savings Account)

The Benefits of Having a Canadian RESP

Investing in your child's future is one of the most significant gifts you can provide, and a Registered Education Savings Plan (RESP) is a powerful tool to help you do just that. Designed to encourage parents to save for their children's post-secondary education, an RESP offers numerous benefits that can make a substantial difference in your financial planning. Here are the key benefits of having a Canadian RESP:

1. Government Grants

One of the most attractive features of an RESP is the access to government grants. The Canada Education Savings Grant (CESG) provides a 20% match on annual contributions, up to $500 per year, per child, with a lifetime maximum of $7,200. Additionally, low- and middle-income families may be eligible for the Canada Learning Bond (CLB), which provides an initial $500 and an additional $100 per year, up to $2,000. I would start by investing at least $2,500/year to maximize the $500 per year grant (That's already a 20% return simply by investing into this account!).

2. Tax Deferral

Contributions to an RESP grow tax-free until the funds are withdrawn. While contributions are not tax-deductible, the investment income earned within the RESP is not taxed until it is withdrawn. When the money is withdrawn to pay for educational expenses, it is taxed in the hands of the student, who typically has a lower income and may benefit from tax credits, resulting in little to no tax liability.

3. Flexibility in Contributions

RESPs offer flexibility in how much and how often you contribute. There is no annual limit on contributions, though there is a lifetime maximum of $50,000 per beneficiary. This allows you to save at a pace that suits your financial situation, making it easier to manage your budget while still investing in your child's education. I plan to invest $2,500 per year until my son turns 18, which would amount to $45,000 in contributions alone.

4. Investment Options

RESPs offer a variety of investment options, including mutual funds, ETFs, GICs, and individual stocks and bonds. This flexibility allows you to tailor your investment strategy to your risk tolerance and financial goals, potentially enhancing the growth of your savings over time.

My strategy when it comes to investing is to pick long-term growth stocks that have a great track record. My plan is to have this account for the next 18+ years. My risk tolerance is at a medium-high as this is a long-term investment. I currently hold 100% stocks in my portfolio.

• Scotia U.S. Equity Index Fund (45% of my portfolio)
• Scotia NASDAQ Index Fund (25% of my portfolio)
• BNS Scotiabank Canadian Top 60 - 5-year GIC (30% of my portfolio)

Click on photo to see the performance of my RESP account so far. Since opening  the account 3 years ago I have a 11.42% rate of return (Not including Government Grants). I will continue to invest in these 3 funds as they have a proven track record, averaging around a 7-10% rate of return per year. At around year 15-18, I would reevaluate my investment strategy to a more conservative approach, investing in GICs and bonds to protect my investment as my son would most likely be starting college or university within the near future. Below are the links to each fund.

https://www.scotiafunds.com/en/home/all-funds/mutual-fund.en.rtcusx.bns382.index-funds.scotia-us-equity-index-fund.html

https://www.scotiafunds.com/en/home/all-funds/mutual-fund.en.rtcsnf.bns397.index-funds.scotia-nasdaq-index-fund.html

5. Encourages Higher Education

Once my son turns a certain age, I will start to teach him about the investment account he has for school. I think it is very beneficial to show kids early about the importance of investing for their future. Having an RESP can serve as an encouragement for children to pursue higher education. Knowing that there are funds available specifically for their education can motivate students to achieve their academic goals and reduce the financial burden associated with post-secondary education.

6. Family Plan Benefits

RESPs can be set up as family plans, allowing you to name multiple beneficiaries. This is particularly beneficial for families with more than one child, as it provides flexibility in how the funds are allocated. If one child decides not to pursue post-secondary education, the funds can be used for another child's educational expenses.

7. Rollovers and Transfer Options

There is always the chance that your child may not choose to pursue post-secondary education. In this event, you have several options. Firstly, you can roll over the RESP funds into your Registered Retirement Savings Plan (RRSP), provided you have the contribution room. This option helps ensure that your savings are not lost and can still be used for future financial goals. Alternatively, you could withdraw the contributions made into the account with no tax implication, although any capital gains will be forfeited. The CESG grant will also be forfeited if your child does not attend school.

8. Support for a Wide Range of Educational Programs

RESPs are not limited to traditional university programs. They can be used to fund a variety of post-secondary educational programs, including college, trade schools, and apprenticeship programs, both in Canada and abroad. This broad applicability ensures that the funds can support diverse educational paths.

Conclusion

An RESP is a versatile and powerful savings tool that offers numerous benefits for families planning for their children's education. From government grants and tax-deferred growth to flexible contributions and investment options, RESPs provide a robust framework for ensuring that the cost of education does not become a barrier to your child's future success. Start investing in an RESP today and give your child the gift of education and the opportunities it brings.