An RESP is a Registered Education Savings Plan. It’s a way for someone to invest money in a tax-deferred investment plan for the purpose of letting a child or younger relative use the money to pay for their education. Ask for specialists at www.heritageeducationfunds.net
“Tax-deferred” means that this is an investment plan with a special tax status. In a tax-deferred plan, the person who owns the plan can put money into it before any income taxes are taken out. That means that all the money going into the account is in pretax dollars. As a result, the investment can grow over time and the investments from the person who set up the account are larger than they would be if taxes were taken out first.
Normally, in a tax-deferred account, the money is taxed at the recipient’s current tax rate when it comes out of the account. This is the case with, for example, a tax-deferred retirement plan. However, the RESP allows the owner to designate a student as the recipient. Because students have little to no income of their own and pay tuition and expenses for school, their income tax rate is very low. As a result, they can take nearly the entire amount of invested funds and use them to pay for all school expenses. So an RESP lets parents or relatives invest on behalf of a child and release the funds to them when they begin post-secondary education, avoiding taxation on the money.
The Canadian federal government also contributes to RESPs, in an effort to encourage parents to use them. The amount and type of the contribution varies, but currently it is capped at $500 per year and $50,000 lifetime total. To start an RESP, families will need to go through a bank or other financial entity. Many RESPs are in the form of group RESPs, which are similar to mutual funds, in that they entail many people pooling their investment together to be managed under one director. If the plan’s owner withdraws funds, they must pay back the government contribution to the RESP in accordance with what they have received.