Should you consider RESP contribution?

If you were able to set aside some money this year, you are probably delighted. After all, that’s very good news! However, you might be facing the dilemma of how best to use your savings. Should you deposit the funds in a Registered Retirement Savings Plan (RRSP), a Registered Education Savings Plan (RESP) or a Tax-Free Savings Account (TFSA)? Or should you use them to pay off debts?

Many of you may be tempted to contribute to an RRSP or pay down your mortgage, two strategies that are excellent options to be sure. However, if you have children, it may be wiser to put the money toward their education, given the federal and provincial grants and incentives available to RESPs.

Here a few of the advantages of contributing to an RESP:

• Income accumulates in the plan tax-free.

• A Canada Education Savings Grant of 20% on the first $2,500 per year contributed to an RESP.

• Some provinces, such as Quebec and Alberta, offer additional incentives.

• Beneficiaries whose parents’ income was below $87,123 in 2011 receive an additional grant ranging from 10% to 20% on the first $500 in annual contributions in 2013.

• Withdrawn funds are taxed in the hands of the child and therefore at a lower rate.

In other words, while RESPs do not share some of the features of RRSPs (tax-deductible contributions) and TFSAs (untaxed withdrawals), the benefits described above, particularly the grants, make them a highly attractive savings vehicle.

Another reason why contributing to an RESP may prove to be a wise choice is that children usually need funds for postsecondary education before their parents need to start drawing from retirement funds. If your child does not pursue postsecondary studies, the return portion of the plan can be transferred to an RRSP. If your child does pursue post-secondary studies, the unused RRSP contribution room can always be used later, as it never expires.