My financial chronicle
An effective yet little known way to invest in your children's future
Your children or grandchildren are still young, and you're already thinking about their future. You want to give them the best possible education and an opportunity to pursue post-secondary studies. Good for you! You want what's best for your loved ones. But education doesn't come cheap. The key is to prepare well in advance and give your kids every chance to succeed. And there's an effective, profitable, yet little known way to save for post-secondary studies: the registered education savings plan (RESP).
What's an RESP?
There are several types of RESPs, but all have certain basic principles in common. Essentially, the registered education savings plan (RESP) lets you accumulate capital without being taxed on the interest income and use the funds to finance post-secondary studies. Added to it is a federal government subsidy equal to 20% of the first $2,000 invested annually for each child 17 or under who resides in Canada.
Anyone can be an RESP beneficiary, so long as he or she pursues full-time studies at a recognized post-secondary institution. You can deposit up to $4,000 into the plan per year, per beneficiary, up to a lifetime limit of $42,000.
What are the benefits of an RESP?
Of course, saving for your children's studies outside an RESP is still an option. But through an annual subsidy of 20%, up to $400 per child per year, the federal government will pay up to $7,200 per beneficiary ($400 over 18 years) into your child's RESP. You'd need a phenomenal interest rate to achieve returns like this!
In addition, principal withdrawn from the plan is not taxable. Students are taxed only on capital gains, but since students generally pay little or no taxes, the tax impact is minimal.
What if my child does not pursue post-secondary studies?
Today, the funds accumulated in an RESP can be used for a far greater number of professional programs than in the past, increasing the chances that these funds will be used as intended. But if a child decides not to continue his or her studies, the plan can be transferred to another child, subject to certain terms. There are also other options that vary depending on the available programs. It is thus important to get all the facts when the time comes to choose an RESP.
The basic principles of RESPs are simple. However, the requirements and options that apply to both investments and the plan itself are numerous and may seem complicated. That's why I put my RESP knowledge at your service to explain the subtleties and various options so you can choose the plan that's right for you.
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