RESP or RRSP?
February 21, 2014
Over the coming weeks, many will receive a tax return thanks to an RRSP investment. If one is exploring the possibility of setting aside this amount, it may be wise to take a bit of a step back and just look at the whole range of options. As an alternative scenario, what if investing savings in a Registered Education Savings Plan (RESP) turned out to be more profitable? Here are a few considerations that are likely to provide you with some insights into the differences between these two products with names alike.
1. RESPs attract government grants
The primary benefit of an RESP is the access to attractive government grants. Every dollar invested in an RESP can be increased by 30% to 60% thanks to government grants. It is possible to receive up to $7,200 from the Canada Education Savings Grant (CESG), up to $3,600 from the Quebec Education Savings Incentive (QESI), and up to $2,000 from the Canada Learning Bond (CLB). Altogether, savings can be increased by up to $12,800*!
On the other hand, RRSPs allow savers to benefit from an income tax refund. This immediate benefit, however, is generally not competitive, especially if the funds are not earning returns.
2. No tax or low tax in the future
When the time comes, withdrawals from RRSPs will be taxed. Under an RESP, the income derived from an educational assistance payment (EAP) is, by comparison, taxable at the student’s no tax or low tax rate since he (the beneficiary) is the actual recipient of the payment.
3. The certainty for a saver to recover his entire investment down the road
When it comes to RRSPs or any other financial product, a choice has to be made at some point between performance and peace of mind. Only a handful of such options offer 100% capital protection. However, in the case of a group RESP ― this type of plan is only offered by foundations ― the reimbursement of subscribers’ savings is 100% guaranteed, pursuant to law.
In addition, all sales charges are reimbursed at maturity with Kaleido; this provider is the only one to offer this guarantee.
4. No dividends paid to shareholders
Any private financial institution pays a dividend to its shareholders. However, the situation is different in the case of a foundation such as Kaleido; the not-for-profit structure of the organization allows it to concentrate all efforts on providing students with the highest possible educational assistance payments (EAPs). As a result, subscribers can sleep soundly and not feel that their hard-earned savings will partly benefit someone else.
5. There is no rush!
Unlike RRSPs, in which case March 1 is the target date to make contributions, RESPs do not involve a beat-the-clock sprint to a contribution deadline. Hence, such a product feature makes it possible for savers to choose a time that suits them to assess different options and make a free and informed choice without being pressured in any way.
When looking at these significant differences, we see that, even before being a worthwhile financial framework for a child’s education, the RESP from Kaleido is essentially an investment vehicle that is both safe and profitable; a rare and valuable asset ― one that no one can afford to do without. By the same token, it should be known that RESPs are not strictly available to parents; any individual can contribute funds for the education of a child.
*Based on net family income. Certain conditions apply.