Is the money into these tax free as an RRSP would be? Or does it just grow tax free?

So the government seems to chip in 20%. Is that taxed at all?

There is no tax break for contributions to the RRSP. You contribute from after-tax income. However, you don't pay tax on the government contribution and all the funds grow tax free.

When junior goes to college and starts drawing from the RRSP this is taxable income. However, students can claim education and tuition tax credits, and have their personal allowances so the tax paid, if any, is often minimal.

-RRSP

+RESP

Thanks guys. Sounds like a good deal but not as good as RRSP. Presumably you try and max out on RRSP first?

Why? They are for different events - retirement versus paying for education.

Most adults contribute to a RESP for the benefit of their children. The 20% the Government chips in is not to be scoffed at. I think of our`s as a savings plan for our kids` University education.

Don't forget you are taxed on the income from your RRSP as you draw it down when you retire.

The same is true in the UK when paying into a company pension. If you notice for every $100 you have said to contribute your pay-slip only shows a deduct of $78 or thereabouts depending on your tax bracket.

RESPs are a good way of saving for kids University Education, in Alberta we also get an additional $500 for opening one (not sure if the child has to have been born here, probably yes, a bit like those child trust funds in the UK) and a top-up 20% a year (up to $7,200 when child turns 18) on your own contributions. Low income families also qualify for additional grants.

If the child does not go to University you have a couple options - use it yourself and do a some University courses (can be transferred to an immediate family member) or roll the amount into an RRSP less the amounts contributed by the government - they want those back plus interest.

Remember if you just did RRSPs and pulled money out to fund education for your children you are taxed on that if you do not replace it within that tax year so probably at a much higher rate than the kids will be considering their jobs (if they have one) will likely be paying much less than you.

The way I see it is that your RESP limit and time frame for building it is limited so I'm focusing on that first. As others said the 20% is not to be scoffed at and cost for education is only going to go up so getting all the $ you can for your kids is a good idea.

Ah, yes.

OK

So I had been muddled as I thought it was like an RRSP and you had to get it in before end of year (although in know its feb for RRSPs).

Think I'll start one up in Jan now the kids have SIN cards. We won't put in the max anyway next year, so starting it now or then is neither here nor there.

Ideally you would do both - but that will necessitate having lots of surplus cash.

If you withdraw from an RRSP you are taxed on the withdrawal. If you are currently in the top tax bracket you will get a 39% tax rebate when you contribute and pay tax at 39% when you withdraw. Effectively you have deferred tax on the income for quite a few years and this is not a bad thing to do.

If you are not in the top tax bracket then you have to think of the difference in tax rates that will apply. It is possible to be in the situation where you get a 25% rebate when you make the contribution and pay tax at 39% when you withdraw. This makes RESPs much more attractive.