4 Things Every Parent Should Consider: The Great RRSP vs. RESP Dilemma
Parents today are often faced with a difficult dilemma: should I contribute to my registered retirement savings plan (RRSP) or my child’s registered education savings plan (RESP)? In a perfect world we’d do both, but with only one or two paycheques and a mortgage to pay, for a lot of families it’s a difficult decision to make.
The facts don’t lie: the average student graduates $27,000 in debt, according to the Canadian Federation of Students. While your child could work part-time to help pay for his or her post-secondary education, that could come at the expense of his or her grades.
Unfortunately, there’s no one-size -fits-all answer. It largely comes down to your family’s financial situation. Let’s take a look at some things to consider in deciding to between the two.
- What Motivates You: Saving Towards Retirement or Your Children’s Education?
While it’s easy to say you’ll save towards your children’s education, actually doing it is a different story. If you have plenty of time before retirement, it’s important to decide what motivates you more. While some parents would rather go on five-star vacations, others derive more joy out of saving towards their children’s education.
If you can’t decide between your RRSP and your children’s RESP, why not do both? By contributing $2,500 each year for 14.5 years, and if you meet the conditions, your child could receive the full $7,200 Canada Education Savings Grant (CESG). Another strategy is to contribute to your RRSP and use your tax refund to fund your child’s RESP. Again, it all comes down to what motivates you. If seeing junior graduate debt-free from university will make you feel all warm and fuzzy inside, consider making RESP contributions a priority.
- Are Grandparents Willing to Lend a Helping Hand?
When you open a family plan, the beneficiary named in the RESP must be related to you by either blood or adoption. Grandparents who are looking to lend a helping hand to their grandchildren’s education can do so with RESPs. Not only does contributing to your grandchildren’s education help them out, it allows your adult children to save towards their retirement. Grandparents will be able to see their grandchildren graduate from college and university and know they had a large part in their success.
- Do You Have a Workplace Pension Plan?
If you have a workplace pension plan, consider yourself lucky. Only about a third of employees in the labour force in 2012 had a registered pension plan, according to Statistics Canada. Even if you have a pension plan at work, it might not be enough. With many employers switching from defined benefit (where your monthly pension is known in advance) to defined contribution (where the only thing known in advance are your contributions), chances are you’ll still need to contribute to your RRSP to fund your retirement.
If you have a decent pension plan and you’re in your 30’s with plenty of time to save towards retirement, you might consider investing solely in your child’s RESP. By contributing to your child’s RESP and meeting the conditions, your child could benefit immediately from tax-sheltered growth and government grants. You can always catch up on your RRSP later on once you’ve maximized RESP contributions.
- How Close Are You to Your Golden Years?
Unless you’re fortunate enough to have a gold-plated government-funded pension, you’ll more than likely still have to save towards retirement. If you’re 55 years old and you haven’t saved a dime towards retirement, unless you want to end up living with your grown up children in your golden years, you should consider making retirement savings a priority. While your child may be eligible for grants, loans and scholarship to fund post-secondary education, once you retire all you’ll be able to depend on are government benefits, which may not be enough to live comfortably on.
Still not sure which RESP to invest in? Download a free copy of the Heritage Education Funds RESP Guide today. This excellent resource provides you with up-to-date information on how you can save for your child’s post-secondary education.