When you have a little one crawling around, it’s hard to imagine 18 years into the future—but the best time to start saving for their education is when they’re young. That could mean investing in a Registered Education Savings Plan (RESP), which has several tax benefits to help you save for post-secondary education.
1) Earn investment income—tax-free
The first bit of good news: you won’t pay taxes on any money you earn from investments made within your RESP, as long as the money stays in the plan. That means you can invest in bonds, stocks, GICs, or ETFs and watch your money grow tax-free all within your plan.
2) Pay for school (almost) tax-free
While taxes don’t affect your money while it’s in the plan, there are some tax conditions to keep in mind when you start withdrawing money from your RESP.
Once you have your child’s proof of post-secondary enrolment, your contributions can be withdrawn tax-free to pay for things like tuition, books and food.
Any additional money that’s in the plan, which could include government grants and investment income, is treated a little differently—it’ll be paid to your child in the form of Educational Assistance Payments (EAPs). Your child pays taxes on EAPs, but since he or she will likely be making little to no income, taxes will be very low.
Even though EAPs probably won’t be taxed heavily, they do have a couple of rules. You can withdraw up to $5,000 in the first 13 weeks of full-time study, but after that, there’s no limit on how much you can take out. If you’re withdrawing more than $20,000, you may be asked to prove that it’s all going towards education. Just make sure to keep proof of enrolment, school statements and receipts on hand.
3) Transfer the money to a different plan
If your child decides not to go to school—or there’s leftover money—there are several ways you can make the most of the RESP and avoid paying unnecessary taxes.
4) Adults can save tax-free, too
Most of us think RESPs are just for kids, but adults can benefit from having a plan, too. Going back to school later in life is becoming more and more common, so if you’re considering it, an RESP can still work for you. While adults won’t qualify for the CESG since you need to be under 18, you can take advantage of tax-free growth on your investments while in the plan.
Now you’re up to speed on the tax benefits of RESPs—giving you even more reasons to start one for your child and help them achieve their future dreams. With CST Spark’s Bright Plan, it’s quick and easy to start an RESP online. Give our planner a try to see how Bright Plan could work for you.
Bright Plan is only sold by Prospectus.