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Dear Parents, What Do You Know About the RESP?

Do you have a RRSP? Great! TFSA as well? Even better! But how about the RESP? The Registered Education Savings Plan is often left aside by parents which unfortunately do not fully understand how it works.

When used properly however, the RESP is probably the most advantageous account there is. Before we dig deeper into why that is, let’s review the specifications of each account:

Registered Retirement Savings Plan (RRSP)

Probably the most famous registered account, the RRSP is appealing because of its short term benefits. Every amount deposited is deducted from your revenues and will result in a tax return at the end of the year. However, most people fail to realize that not only will these funds will be taxed upon withdrawal, but they will be taxed as salary. This means that all the accrued dividends and capital gains (which normally benefit from a favourable tax treatment) will lose all tax advantage. Therefore, the RRSP does not reduce but postpones your taxes.

Tax-Free Savings Account (TFSA)

The TFSA allows for investment returns to be accumulated within the account without ever being taxed, not even upon withdrawal (which can be anytime, the funds remain accessible). This being said, contributions will not be deducted from revenues either, which might make it less appealing from a short-term perspective. On the long-term however, it can be extremely beneficial when used for dynamic investments.

Registered Education Savings Plan (RESP)

So what about the RESP? It works pretty much like a TFSA, but is intended to finance the childen’s post-secondary education. Contributions will therefore not be available until at least one kid reaches the post-secondary level; however, governments will match 30% of all contributions up to a yearly maximum of 2 500$.

You therefore end up receiving a 30% grant from the governments, much similar to what the tax return on a RRSP contribution would have been, with the difference that you will not be taxed upon withdrawal. For families with more than one child, the yearly maximum is increased proportionally to the number of children.

Unsure of where you stand? Please do not hesitate to contact us should you have any questions, concerns or desires. Till next time!