How financial programs like RRSP, RESP, and RDSP work in Canada?
What is common about RRSP, RESP, and RDSP is that they are all registered savings plans sponsored by the Canadian government. The three programs serve different purposes. For instance, an RESP is a plan that helps Canadian parents or guardians to save money for their kids’ post-secondary education. Besides, some RESP providers like Knowledge First Financial also provide scholarship opportunities to RESP beneficiaries.
How a Registered Education Savings Plan (RESP) Works in Canada
When parents open an RESP account for their children, they must periodically contribute some money into the account. The motivating factor in saving education funds in RESPs is that the government offers incentives like tax-free investments and grants in the form of Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB).
The government allows the parents’ investments plus capital gains to grow tax-free. Also, it guarantees a 20 percent grant of the parents’ contribution up to CA$2,500 per year. All beneficiaries can receive a maximum CESG of CA$500 in a year. When students enroll in post-secondary education, they can withdraw the investments plus interests earned as Educational Assistance Payments (EAPs).
How a Registered Retirement Savings Plan (RRSP) Works in Canada
RRSPs are government-sponsored savings plans that help Canadians who earn income to save money for their retirement. Upon opening an account, you must contribute some cash towards every year you file tax returns. However, there is a contribution limit that’s equivalent to 18 percent of your previous year’s earned income.
The contributions made to an RRSP account are tax-deferred. The government doesn’t impose taxes on investment until withdrawals after retirement. However, withdrawal taxes will be much less than the taxes you would have paid on the same amount before savings. Any money you put into an RRSP reduces your taxable income for that year.
How a Registered Disability Savings Plan (RDSP) Works in Canada
An RDSP is ad Canadian registereand matched savings plan that helps disabled people to save money. It offers the best returns on investments compared to other registered savings plans. Besides, any person can contribute towards an RDSP account, including friends, family, and even neighbors. That also gives other people the chance to help.
With an RDSP account, you can get the Canada Disability Savings Grant of up to 300 percent. The maximum grant you can receive in a year is CA$3,500 and in a lifetime is CA$70,000. You can also apply for the Canada Disability Savings Bond of up to CA$1000 per year. The amount of grants and bonds you will get depends on your family’s income and contributions.