We were inspired to write this article after reading the article titled What to do when education savings need a boost that was recently published on Assante’s website

With average tuition costs at Canadian colleges coming in at nearly $7,000 a year, it’s no wonder that many parents worry about how they’ll pay for the kids’ educations.

Certainly, this and other education related expenses are better handled if there is a long-term plan in place. Financial tools, like a registered education savings plan (RESP), are key components that come into play when families with children begin mulling over future costs related to education. These tax-free accounts can be a smart part of the average Canadian investor’s college savings strategy.

If you are trying to figure out if a RESP would be a good move for you, here are five reasons why you may benefit from starting one of these savings accounts for your child’s education.

1. Registered education savings plans are tax-free

While you cannot deduct the amount you contribute into your registered education savings plan on your yearly taxes, you can avoid paying taxes on the money contributed to the RESP while it’s in the account.

That means if you open an account when your child is born, and he or she doesn’t go to college until your child’s 18 or so, then that money won’t get taxed for 18 years. This is one of the chief reasons why a financial advisor may suggest that you consider this tool as part of your investment strategies.

2. RESP’s benefit from a 20% annual match

The Canadian government gives individuals contributing to a RESP a helping hand!

Whatever you contribute to your RESP, the government will give you a 20% match on your money; the government will match up to $500 total each year. Over the lifetime of the account, the Canadian government will pay out $7,200 in matching funds.

Additionally, according to Money Sense, lower- and middle-income families can potentially access additional money over the initial 20% match. Lower- and middle-income families can potentially gain from the fact that the Canadian government will pay out another 20% on the first $500, bringing the contribution for the year up to 40%.

This is one of the biggest reasons why a RESP can help you financially. Even if you “only” get the minimum match, you will have at least $7,200 extra dollars at payout time that you didn’t have before. This essentially accounts as the average cost of one year in college for most students. This makes a lot of financial sense for any family and can take financial pressure off of a lot of Canadians that want to put a child in their family through school.

3. RESP’s last a long time

Registered education savings plans have a long shelf life!

RESP’s can stay open for 35 years. You can contribute to them for up to 31 years. This means that if your child gets an advanced degree later in life, there will be money.

4. An additional investment strategy

In the world of investing, it never hurts to diversify. Opening a RESP account gives you an additional financial means to expand your investment portfolio. Many financial advisors recommend RESP’s within the context of a larger investment strategy because simply, RESP’s can help reduce risk. As registered education savings plans are traditionally a more risk-free form of investment they can help remove some angst commonly associated with other forms of investments that come with inherent risks.

RESP acronym

While it goes without saying most investors expect a decent return on investment on their investments over the long haul, there is a general awareness that all investors have that there will be times when your investment accounts dip, loose value and simply go down.

If this down time comes at the same time that your child is set to start college, then paying for his or her education could become a major issue. Smart investment strategies like the RESP can help mitigate this scenario somewhat.

The other advantage is that compared to some other types of investment accounts, the RESP account is easy to access. Basically, when you’re ready to finally pay for your child’s education, the money will typically be ready for you without you having to go through too much trouble accessing your money.

5. Others can contribute to a RESP

The fifth and last thing that makes a RESP appealing to a lot of Canadians is that other members of your family (even friends) can contribute towards it. If you have friends that feel generous and want to open an account for your child, they’re allowed to do so.

This allows grandparents, cousins, godparents and other important people in your child’s life help your child in a very tangible way.

Final Words

Opening a RESP or registered education savings plan is one of the smartest investment strategies you can make. This tax-free account allows you to save money for your child’s education and get some supplemental financial help from the Canadian government in the process.

Additionally, RESP accounts have a long shelf life compared to many college investments options you might come across. Because they’re such a stable form of investment, you never have to worry about your money being gone come time you want access to it. Unlike riskier, market-based investments, RESP’s offer a good rate of return, minus the risk.

Should you be interested in learning more about how a RESP could help you or any other investment strategies, please feel free to contact us by clicking on the link below.

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This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.