Using Mutual Funds in your Registered Education Savings Plan (RESP)

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Mutual Funds allow the investor the same access to securities as the institutional investor—access to stocks and bonds from many different companies. Moreover, mutual fund investments can gain the tax-advantaged benefits if they are registered in one or more of several savings plans offered by the Canadian government.

Mutual funds area great way to diversify your Registered Education Savings Plan (RESP). You can start investing in mutual funds for your child’s education long before he or she reaches college or university age. Small monthly investments can add up over time to cover all or part of the following costs: tuition, books, accommodation, a cafeteria food plan or weekly groceries, a car payment plus insurance and gas or public transportation, furniture, a telephone, and of course spending money.

The Canda Education Savings Grant (CESG)

The bonus of the RESP is that the government actually grants you a percentage of your contribution. Thus both your contribution and the government’s grant are invested in the RESP. The added benefit of reinvesting the 20% government grant ¹ automatically in the mutual fund creates, even more, potential compounding. The RESP will grow tax-deferred until your student needs it. You can diversify among many types of funds which invest in companies of several international countries. For CESG information click here.

Mutual funds can enjoy tax deferral in the Tax-Free Savings Account (TFSA). The TFSA is a great investment if you are a member of a pension plan and have minimal if any, room to invest in your RRSP due to a high pension adjustment (PA) factor.

Educational Savings Use You can also supplement RESP savings through the TFSA. After-tax investments grow tax-deferred and there is no taxation on withdrawal. This makes the TFSA versatile for deferring investment taxation, plus avoid taxation upon withdrawing monies for numerous uses. However, the TFSA will not offer the benefit of the CESG.

¹ Check here for the limit on the CESG.

Source: CRA

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