We are living in a competitive world that is driven by education and post-education education has become more imperative than ever. This increased demand has led to increased tuition costs and other education-related costs that will require families to put more support in paying for this education. Most families have taken advantage of the Registered Education Savings Plan commonly known as RESP to help cover for the post-secondary education of their children. This government initiative has become very important for many Canadian families as it offer numerous benefits. Below are some of the main reasons why you should have an heritage RESP.
1. Reducing financial burden for parents and beneficiaries
An RESP, if well taken advantage of can be a huge relief to the financial stress that face many students and families. The high tuition fees will increase financial strain to many people who have not saved up with RESP. There will be large payments directed to education and this will affect other household budgets. Also, there have been numerous cases of education debt after graduation. This will follow the beneficiary later in life and can be a huge financial strain in future. A good heritage RESP will ensure that the child will graduate with little or no debt making life much easier.
2. Withdrawals are taxed in the hands of students
What this means is that one can start withdrawing money from the RESP once the child starts his or her post-education program. The withdrawals of the original contributions will be considered as a refund and will be tax-free. The government grants and other incentives that are gained within the RESP will be taxed in the hands of the student in the withdrawn year. The RESP withdrawals will be zero or negligible taxed since the students normally have little or no income at all.
3. Free Money
Imagine the thought of free money for your child’s post-secondary education. Well, this is exactly what you will get with the government grants and other incentives that come with an heritage RESP. For example, in Canada, the government provides 20% per dollar of the first $2500 annually. Furthermore, for low income families there will be an extra 10 to 20 percent on the first $500 per year. Other provinces offer their citizens other financial incentives contributed to the RESP.
In an RESP, one is not required to pay tax on the interest income and capital gains within the period of the plan allowing the savings to grow faster. Also, taxes aren’t paid during withdrawals as there are no deductions on the primary contribution. It is only the accumulated income which will be taxed in the student’s hands and at a lower rate since they’re at a lower tax bracket.
5. Friends and family can also contribute
Other members of the family or extended family and friends can open an heritage education funds RESP for your children and contribute. Actually, these RESP contributions are just like birthday gifts.