The RESP and RRSP are as Canadian as flannel shirts and toques. You’ve probably heard of both of these savings tools, and like many Canadians, you may have questions about how they work and if one’s better than the other. But just like you can wear a flannel shirt and a toque, you can choose to have an RESP and an RRSP.
Registered Education Savings Plan (RESP) and Registered Retirement Savings Plan (RRSP), are both types of savings accounts or savings plans, and they both have major perks! They also each come with their own set of rules. Let’s break them down for you.
Comparing RESPs to RRSPs is like comparing apples to oranges
The RESP and RRSP are both pretty sweet, but they’re meant for two very different and important financial goals: the RESP is for your child’s future—to pay for their post-secondary education; the RRSP, on the other hand, is for your future—your retirement.
You can invest in an RESP for as long as 31 years, although to access government grants for your RESP you can contribute until your child turns 17. Then, the child, once enrolled in post-secondary studies, can use that money to pay for tuition, rent, their cell phone, sushi for late-night study sessions, and other costs they face as a post-secondary student, whether they go to school in Canada or abroad. And trust us, they’ll need it as much as they need you to teach them how to use a washing machine. Our projections show that in 18 years from now, a young person will need $153,000 (if not living at home) to get through four years of university in Canada.
On the flipside, an RRSP has a longer investment time period. Since it’s used to save for retirement, Canadians can invest until they turn 71.
For both of these registered plans, the sooner you start, the longer your money has to grow.
With both the RESP and the RRSP, the golden rule of investing applies—don’t wait. The earlier you invest, the longer your money has to grow. You don’t need to have a lot to invest; you just need to get started, to give investment earnings time to earn more earnings. And remember, the education savings window is shorter than the retirement savings one, and you don’t want it to pass you by.
Only the RESP serves up government grants
Contributions made to an RESP are after tax dollars and can’t be used to reduce your taxable income, but contributing to the RESP can attract grant money from the government to help boost your savings.
Through the Canada Education Savings Grant (CESG), the government matches a whopping 20% of your RESP contributions. The CESG will contribute up to $500 a year to your RESP (or more if you have unused contribution room). In the course of your RESP investment, each child qualifies for a lifetime limit of $7,200. That’s a pretty sweet thank you from the government of Canada for investing in your child’s education. You might even qualify for the Canada Learning Bond depending on your income and other provincial grants depending on where you live. These additional grants can add a few more thousand to help your future lawyer, nurse or entrepreneur pay their way through school.
Dare we say that for both, you can relax when it comes to tax?
While your money is invested in either plan—and growing—any investment earnings are tax-deferred, so you don’t have to worry about paying any taxes on it while it's in the plan. Just like the tax-free savings account (TFSA), your RRSP and RESP investments can grow tax-free for years, decades even.
The RRSP offers a unique tax perk, by letting you reduce the tax dollars you have to pay. By putting money in your RRSP, you receive a tax deduction and also defer paying taxes on it until the time you take it out (usually during retirement). Your RESP contributions, on the other hand, don’t reduce your income tax when you put the money in. But your child may never have to pay tax on the investment earnings. That’s because tax is only due when the money is withdrawn, and the whole idea with an RESP is for your child to withdraw the money when they’re in post-secondary school…as a student, they will be in a much lower tax bracket, with low taxable income. (Enjoy it while it lasts, kid!)
Don’t think you can contribute to both your RRSP and your RESP? Try this.
When you’re raising kids, it can be hard to save. You’re paying for their activities and the shoes they grow out of after wearing all of six times. We get it. But you don’t have to choose between contributing to your RRSP and your RESP. One trick is to contribute to your RRSP, and then invest the tax refund you get into your RESP. Plus, you can start a CST Spark RESP with a single contribution of $500 or as little as $10 a month.
See? The RESP and RRSP aren’t in competition. They complement each other, like poutine and pale ale.
The simple, digital RESP for the next generation.
At CST Spark, we provide RESPs for on-the-go parents, aunties, uncles and grandparents looking for a convenient and smart way to save money for their little superstars’ future education. We rebalance your investments automatically as your child ages, maximizing growth early on and preserving your gains closer to graduation, so you can be confident that you can help your bright star when they start post-secondary school. And we diversify your investments in a range of Canadian and global exchange traded funds and maintain a competitive management fee.
Have questions or want more information? That’s what we’re here for. We’re happy to answer your questions, 6 days a week, over the phone or live chat.
CST Spark Education Portfolios is only sold by Prospectus. Copies may be obtained from www.cstspark.ca or by calling 1 (800) 461 7100.
C.S.T. Spark Inc. is the distributor and manager of the CST Spark Education Portfolios.
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