A registered education savings plan, or RESP, is fantastic tool for people who want to be able to pay for college — or any post-secondary education. RESPs are government-regulated accounts, and offer tax-free investment growth.
Here’s how it works: an RESP is opened in the name of the future university or trade school student by anyone — a parent, grandparent, or friendly neighbor who got in on Bitcoin early. There’s also something called a “family RESP,” which has the advantage of being able to be spent on any sibling in a family instead of just one child — but it must be opened by parents or grandparents.
There are huge benefits to opening an RESP. First, there’s the free money: the government’s Canadian Education Savings Grant (CESG) will match 20% of up to $2,500 per year per child. And CESG will keep matching annually until it maxes out at $7,200 per kid. Then there are the mega tax benefits: as long as the money sits in the RESP (and the accounts can remain open for 36 years) all gains will remain tax-free. When a student does withdraw money to pay for tuition or university-related expenses, he or she will owe tax only on the interest, dividends, capital gains, and the government’s CESG contributions.
What if the kid decides to skip university in favor of bread baking, or tech-startup-founding? The money can be used by a sibling for his or her education. Or the money can be transferred to the contributor’s personal RRSP retirement account free of any tax penalties- though the CESG contributions will be returned to the government, of course.
Of course, we’re not against putting your kids to work to help pay for school. It’s character building.