Isn’t it nice when you go to your bank to deposit a cheque and they hand you $500 just as a thank you having an account with them?
No? That’s never happened to you?
Strange. Then you must not be using RESPs!
The RESP, or Registered Educational Savings Plans, is a fantastic initiative by the Government of Canada to help you pay for your children’s post-secondary education.
It’s a tax-shelter similar to the RRSP and TFSA, with some key differences. Unlike an RRSP, your contributions are not deducted from your income. In that way its more similar to the TFSA — but unlike the TFSA there’s is no annual contribution limit. Instead, there is a lifetime maximum contribution limit per child of $50, 000.
Your beneficiary pays tax upon receiving the money, but they’re likely to pay nothing since as a student their income is so low.
That means you have potentially 35 years (you can only contribute, however, until your child is 31) of tax-free accumulation and growth for your investments.
That should be enough incentive alone to use an RESP, but as a sweetener, the government will also top up your contributions with grants.
You’ll get 20% of annual contributions to a lifetime limit of $7200.
Basically, if you contribute $2500 a year starting when your baby is born, you’ll get a $500 bonus each year until your child is 14.
$500 doesn’t sound like a lot? Consider that’s an entire semester worth of books, a back-to-school tablet, and at least two months of groceries for your kid. All for free.
But you’re not just getting $500, you’re really getting $500 that you can invest tax-free. If you do it right, you can grow it big enough to fund a year or two of tuition itself.
Let’s run some scenarios to see what a difference it can make in your investment strategy:
Let’s say you contribute $2500 annually to your RESP in a mix of funds that earn 5 per cent a year from the time your child is born until he’s 18. Your total contributions equal $45,000.
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