A Registered Education Savings Plan (RESP) is a savings account used for the post-secondary education of a child or other payee. An Heritage RESP account can be opened by anyone, and you do not need a bank account to open an RESP. Heritage Education Funds accounts offer a proactive way to start saving for the high tuition costs of post-secondary education. Here we will describe four benefits of RESPs.
1. Protect growth from taxation
Although contributions to an RESP account cannot be deducted from taxable income, growth on contributions are not taxed. This means that any investment income earned on RESP savings as long as they stay in the account. As a result, savings grow more rapidly than money in traditional savings accounts. Since 2007, there has been no limit on the amount account holders can contribute each year. However, there is a lifetime contribution limit of $50,000 for each RESP recipient.
When the student is prepared to withdraw the funds, money is paid out as Educational Assistance Payments (ESPs). Although ESPs are subject to income tax, students with little or no other income can withdraw the money tax-free.
2. Receive government grants
Holders of an Registered Education Savings Plan account qualify for government grants such as the Canada Education Savings Grant (CESG). Grants are offered as a way to incentivize saving for post-secondary education. The CESG is paid by the government into an Heritage RESP account, and provides 20 percent on every dollar contributed up to a maximum of $500 per year. There is a maximum lifetime of $7,200 earned through the CESG. Any unused grant amounts are carried forward into future years.
Additional provincial grants may also be available in certain provinces. For instance, the Quebec Education Savings Incentive (QESI) provides 10% on every dollar contributed, up to a maximum of $250 per year. Families in low or middle income brackets can also qualify for an additional $50 each year. Similar grants may be available in other provinces for eligible recipients.
3. Accounts are flexible
An RESP account can remain open for up to 36 years. If the intended recipient has decided to postpone plans for post-secondary education, the savings can remain in the account for this period. In the case that the intended recipient decides not to use the funds, the contributions can be transferred to another beneficiary. If savings are not transferred to another recipient, earnings on investment may be payed out as an Accumulated Income Payment (AIP) to eligible account holders. In this case, interest earned on savings as well as government grants will be returned to the account holder. AIP earnings are subject to taxation.
4. Preparing for the future
The costs of higher education are steadily rising. By 2036, it is estimated that tuition costs for a 4-year degree will average $84,000 not including living expenses. An RESP account provides an effective means of saving for the future and earning additional income. Since earnings on investment will compound each year, the earlier you start contributing to an RESP more your income can grow.
A Registered Education Savings Plan allows you to begin planning for a child’s future. These and other benefits highlight how RESPs can get you started in the right direction.