Registered Education Savings Plans (RESPs) are an excellent tool for saving for a child’s education because taxes are deferred and the government contributes free money. As a contributor, you retain full control of not only what you invest in but also how the money gets paid out when it gets cashed in.
Saving up beforehand is prudent because interest builds up quickly over time – a small sum invested into a RESP starts accruing interest that is immediately added onto the principal so that it can earn more interest. This process quickly hastens when RESP contributors take the time to invest small sums into RESPs on a regular basis, letting them prepare for the beneficiaries’ future well before it is time. Income earned on the sums invested into RESPs cannot be deducted from the contributors’ tax returns, but the taxes on that income are not paid until the money is withdrawn from the RESPs. Furthermore, RESPs can benefit from both federal and provincial grants designed by the governments to encourage education savings. One such grant is the Canadian Education Savings Grant (CESG) that can add up to $500 a year to RESPs still actively receiving contributions.
Most RESP contributors are related to the intended beneficiaries of RESPs. These contributors can split up the money as they want between the beneficiaries, list multiple siblings as beneficiaries of the RESPs and can even transfer unused funds to other siblings listed as beneficiaries. But this does not mean that RESP contributors must be related to the intended beneficiaries. Contributors can and often do create RESPs for beneficiaries other than children and can even designate themselves as beneficiaries if they want.