Posted on Monday 22 June 2020
There are plenty of options when it comes to where and how you can save money. But the biggest mistake that many Canadian consumers make is failing to choose the right savings account for their needs.
Whether you are considering a high-interest savings account, a retirement savings plan, or anything in between, the long-term success of your ability to save often depends on selecting the right savings product for you.
An RESP is a popular choice for many consumers—but how do you know if an RESP is right for you? What are the benefits of choosing an RESP instead of a TFSA or an RRSP?
If you’re not sure whether you should open up an RESP (or even what an RESP is), keep reading: we’ll show you exactly what makes this savings account unique, and why you should consider opening an RESP today.
First things first: what is an RESP? A Registered Education Savings Plan (RESP) is a savings account that is designed to help parents pay for their child’s future education costs.
But you don’t even have to be a parent in order to set up an RESP: grandparents, aunts, uncles, or family friends can set up a Registered Education Savings Plan for anyone who may be going to college in the future. An RESP can be created any time after a child is born—which is good news for new parents, as higher education costs can easily average between $50,000 to $55,000 CAD.
So where can you get an RESP? First, check with your local bank to see if they offer education savings accounts. If you have already established a banking relationship, you may even be eligible for special rates or promotional periods. If not, you can explore other banks, credit unions, and financial institutions.
Whether you choose to go online or visit a brick-and-mortar location, there are plenty of opportunities to find the best RESP rates and terms.
An RESP isn’t a requirement in order to put money aside for education costs—you could just as easily open up a high-interest savings account or even a tax-free savings account. But there are a few key benefits to an RESP that might make this the best savings account for you. Take a look below for an overview of the advantages of using an RESP.
By and large, one of the biggest advantages to an RESP is that your contributions are matched by the government. The Canadian government will match up to a maximum of $7,200 of your contributions—which could eventually add up to one or two free years of education! Not only is this a great motivator for the recipient to enroll in college after high school, but it’s also a great way to boost your saving power, simply by making the contributions that you were planning on setting aside anyway.
There are a few limitations to consider, however. The first is that the dollar-for-dollar matching will only apply to the first $2,500 deposited each year—so if you put $7,200 into your RESP right out of the gate, the government will still only match $2,500 of that amount. You’ll need to deposit another $2,500 the next year in order to receive the next installment. Because RESPs are meant to build in value over time, the best approach is to deposit at least $2,500 each year for the first three years, which will ensure that you receive the full dollar-for-dollar match.
The second limitation is that once you have capped off that $7,200, the RESP account will no longer be eligible for matching deposits from the government. If you want to boost your savings account even more (i.e., if you have more than one child), you should open up another RESP account and begin making $2,500 annual deposits to continue receiving dollar-for-dollar matching.
Once an RESP is created, you can make contributions for up to 31 years, and the account can remain open for a maximum of 35 years. And keep in mind that, in total, an RESP cannot exceed $50,000.
They say it takes a village to raise a child—and the same is often true when it comes to saving for college tuition. The good news is that there are no limitations to who can contribute to an RESP (or when). Aunts, uncles, grandparents, or even family friends can make deposits throughout the life of the account.
Contributing to an education savings account makes a great gift idea at all ages, but particularly for younger children, as deposits made early on will have the greatest impact based on interest accumulation. Depositing sooner—rather than later—is what will help your RESP grow over time.
And as the recipient gets older, an RESP can even be a good way to introduce them to the benefits of saving and basic money management. It’s a great place to stash away all of those $5 bills that come in birthday cards, cash from babysitting (or even extra allowance money) and gets them to think about how saving money can really pay off in the long run.
Taxes: the dreaded five-letter word. Thankfully, contributions in an RESP get a little bit of a tax break—which is always a relief! Any money that you put into a Registered Education Savings Plan will earn interest tax-free. Earnings from interest will be taxed only when the RESP is closed and applied toward education expenses.
It can get a little tricky if the recipient decides not to go to college after all. You’ll still pay taxes on the interest earned, but it may be at a higher percentage, and there could be additional terms and conditions to meet. Make sure you discuss both scenarios with your financial institution so that you understand exactly what happens if your RESP will not be used for education expenses.
Planning for post-secondary education can be incredibly exciting and rewarding—but figuring out how to pay for it without falling neck-deep in student loans can be a daunting task. With an RESP in your back pocket, you can get peace of mind knowing that your child, grandchild, niece, or nephew will be well-prepared to pay for their higher education!
As with any financial product, the most important first step that you can take is to shop around at a few different financial institutions to ensure that you get the best RESP. No two savings accounts are created equal—make sure you get the interest rates, terms, and limits that are right for your financial needs.