Life is expensive and without some form of post-secondary education it’s nearly impossible to get a job that will cover these expenses. That’s why so many parents start saving to help educate their bundles of joy while they are still, well, bundles of joy. But what is the best way to save?
There are number of ways to do it, but let’s focus on the two that garner the most attention, (and the most dollars), and for good reason: the RESP and the TFSA.
Whether it’s best to start an RESP (Registered Education Savings Plan) or a TFSA (Tax Free Savings Account) for your child depends on a number of personal and financial factors.
In some ways, these plans are the same. In both instances, deposits are made with “after tax dollars,” (unlike contributions to your RRSP). Both plans provide sheltered growth – meaning that the income you earn along the way is not subject to taxation while the money remains in the plan. And both plans have limitations imposed with respect to contributions.
And in some respects the plans are different. First of all, the RESP gets contribution from the government – a match of 20% of your contribution (with a limit of $500 per annum) known as the CESG (Canadian Education Savings Grant). The TFSA is just your money. Give a point to the RESP in this regard.
But, the TFSA allows you to withdraw at any time and for any reason without any taxation, whereas the RESP can only be withdrawn and applied to post-secondary education expenses for the beneficiary (your bundle of joy) and the CESG and the growth earned in the RESP are then subject to tax. Score one for the TFSA here. But wait – the tax is in the hands of the child – a student at the time, and in most cases given the tax deductions and low income of the child at the time, will probably not result in any tax being paid. In this category perhaps it’s a draw.
If your intent is to use the funds for educating your child, the fact is that the addition of the CESG should swing your attention to the RESP. More money is after all better than less. But, if you are worried about the risk that your child may not go to post-secondary school and you are forced to unwind the RESP in a less favourable fashion, then perhaps you would be interested in the more flexible TFSA.
The truth is – in most financial plans you should be using both. Our advice is often this: the TFSA can be (should be) an important component in your long term financial plan and as such, should not be used for education savings – especially since there is a plan established just for that goal.
So, when it comes to the RESP vs the TFSA, our answer is often “both.”