Q

What's the difference between an RRSP and an RESP?

A

An RRSP helps you save for retirement. An RESP helps you save for your child's education.

As anagrams go, RRSP and RESP look quite alike and indeed have major similarities apart from having three letters in common. Both are registered investment accounts that offer easy ways to save. If you’re a parent, you’re absolutely going to want to open one of each and contribute as much as you possibly can to both.

RRSP is an acronym for “registered retirement savings plan” and, naturally is all about saving for when you’re old. RESP stands for “registered education savings plan” and provides a great way to sock money away for your child’s university education.

But the way these two accounts save you money differs dramatically. RRSPs allow you to contribute as much as 18% of your income “pretax,” meaning the government will only tax you on your post-contribution income amount. A guy who makes $50,000 but socks away $5,000 for his golden years will only pay income tax on $45,000. RESPs are also financially beneficial, but function differently — the government provides matching funds for 20% of any contribution up to $2,500 per year (for math slowpokes, that’s up to $500 of free money per year.) The government will continue showering your account with free money annually up until the account recipient hits a lifetime max of $7,200. An RESP can be used for any education related expenses and can even be transferred to a sibling if your child opts to forgo a university education.

The two account types also differ in how your money is taxed once withdrawn. Since RRSPs are a tax deferral plan, you’ll have to pay taxes on the value of the investment when you withdraw it in retirement (and, with a couple exceptions, you’ll be taxed mightily if you withdraw the money before you retire.) RESP funds, however, are taxed less upon withdrawal; students will be obligated to pay taxes only on the interest, dividends, capital gains, and the government’s contributions.

More about
Registered savings plans
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