The Facts on RESPs

Make the Educated Choice for Your Child's RESP

As a caring parent, you want your child to enjoy a successful life. Today, that means a post-secondary degree or specialized training is a necessity, not an option.

A Registered Education Savings Plan (RESP), created by the Federal Government to help parents provide full education opportunities for their children, allows you to save up to $4,000 per year per child, to a lifetime total of $42,000 per child in a tax-sheltered plan.

Your savings will grow with the help of special plan features:

Receive an additional 20%.

You'll benefit from the Canada Education Savings Grant (CESG), a government grant that provides an amount equal to 20% of your RESP contributions. It's extra money that can add up to $400 per year for each child, to a maximum grant of $7,200 over the life of the plan. The grant money will will earn investment income, too. Learn more .

Tax-sheltered growth.

RESPs offer tax deferral on the investment income earned on your savings over the years. If you were to save outside an RESP, your earnings would be subject to tax, greatly decreasing the money available for your child's education. When you save in an RESP, your contributions and your CESG enjoy compound growth that is tax-sheltered.

When the time comes to withdraw funds from your plan, the money is paid in your child's name to reduce taxes. Since students have generally low income levels, little or no tax is payable.

This example is based on a monthly contribution of $166.67. Investment income is calculated at an average annual rate of return of 6% compounded semi-annually over 18 years and excludes fees. Canada Education Savings Grant is 20% of contributions to a maximum of $400 per child per year. Non-RESP earnings assume a marginal tax rate of 40%. The value of an RESP with CESG is used only to illustrate the effects of compound growth rates, and is not intended to reflect future values of your RESP or returns on investment in your RESP.

An RESP is the Best Overall Choice

No other savings option provides as many advantages as an RESP. For example, if you were to save in your RRSP and then withdraw it to pay education costs, you'd have to pay income tax on the full amount you withdraw at your tax rate. With an RESP, the interest earnings are paid in the name of your child. Students have generally lower income levels, so little or no tax is payable.

Also an RRSP is not eligible for the 20% grant. You'd be passing up extra money.

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