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RESP vs. RRSP - What's the difference?

When it comes to saving for the future, it is easy to get confused. Banks, trust companies, financial institutions, insurance companies all claim to offer the best plan for your dollar - how do you choose?

Let's get one issue dealt with here: an RESP and RRSP are quite different investment vehicles.

A Registered Education Savings Plan is, as the name implies, a savings plan to fund your children's education, specifically post-secondary schools such as colleges, universities, trade schools, and so on.

Although RESPs have been around since the 1960's, the government introduced the Canada Education Saving Grant (CESG) in 1998, making RESPs much more popular.

A Registered Retirement Saving Plan is a saving plan to fund your retirement above and beyond any other pension you might qualify for. Getting the best return on your money is obviously a big consideration, and if you are not interested in managing you own investments, there are lots of companies who will do it for you. Finding a financial advisor that is recommended by a friend or family member is usually a good starting point.




What are the tax advantages of RESPs and RRSPs?

The money contributed to a retirement saving plan is tax-deductible, and taxes on that money and the interest it accumulates (hopefully..!) will not be taxed until you withdraw it after you retire. Your income will most likely be lower at that point, you will be in a lower tax bracket, and will pay less taxes on that amount.

An education savings plan on the other hand is funded with after-tax dollars, so the money that is contributed to the plan is not tax deductible, unlike an RRSP.

The interest and grant it accumulates within it, however, does grow tax-free. The contributor (parent, grandparent, aunt, uncle ...) does not pay taxes on the growth of the fund. At maturity, when the child turns 18, the principal that was saved in the RESP account will be returned to the contributor (parent, grandparent, aunt, uncle,...), and because they contributed with after tax dollars, they do not pay taxes on this.

 

The interest, grant and interest on the grant will get paid out to the child/student, but because they very likely will be in a low tax bracket, very little taxes, if any, will be payable on this amount.

There are tax implications if the child does not pursue post-secondary education: besides transferring the money to a sibling (this would be the best option), the money may be withdrawn and transferred to an RRSP if there is contribution room available. Otherwise, the money can be withdrawn as an Accumulated Income Payment (AIP), and incur a 20% tax penalty.

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