TFSA vs. RESP: Which is Better For Saving For Your Child’s Education?
Though Canadian parents may make different choices when it comes to saving for a child’s education, there’s one thing that few will disagree on: post-secondary education is expensive and not likely to get cheaper any time soon. In fact by 2033, the cost of a higher education (the full cost of a four-year undergraduate program – tuition and accommodation away from home) has been estimated at being over $122,000!
With numbers like that, today’s parents need to think carefully about whether to invest education savings in a Tax Free Savings Account (TFSA) or a Registered Education Savings Plan (RESP). While both options help families save faster (by contributing after-tax income that grows tax-free within the plans until the plan matures), they each have features that may make them more or less attractive to investors, depending on individual family situations.
TFSA and RESP Contributions Grow Tax-Free
Though contributions and income earned in both plans grow tax-free, withdrawals are treated differently. While TFSA withdrawals aren’t taxed, RESP withdrawals are taxed at a student rate. However, this is often a non-issue since most students will be in a low tax bracket while they’re pursuing a post-secondary education.
It’s All About The Grants
Contributions to both TFSA accounts and RESPs are made with after-tax income, yet an RESP gives you an added opportunity to boost your savings. That’s because RESP contributions may be eligible for government education grants like the CLB (Canada Learning Bond) and CESG (Canada Education Savings Grant), plus additional provincial grants if you live in British Columbia, Saskatchewan, or Quebec. This could add upwards of 20 percent to your contribution (to a maximum of $500 per child or $7,200 lifetime maximum) and may help your education savings grow even faster.
TFSA vs. RESP: If My Child Doesn’t Pursue Post-Secondary Studies
While many parents hope their children will choose to continue their education after high school, the reality is that not all of them will. If you’ve contributed to an RESP and the plan has received grant money, these funds plus any income they’ve earned within the fund will be returned to the government. Since a TFSA may be used for any type of savings, parents may still choose to gift the money to their child to use for something other than education.
Easy-Access TFSAs May Tempt Spending
Banks, credit unions and online trading platforms may offer TFSAs that can be accessed and monitored online, allowing you to easily make contributions and withdraw to your bank account as needed. However, this easy access can also be a disadvantage for parents who struggle with self-discipline. Money you may have earmarked as education savings could be too tempting to withdraw from a TFSA, whereas it’s more difficult to withdraw RESP funds for non-educational purposes.
Consider Contributing to Both an RESP and a TFSA
While there isn’t an annual contribution limit for an RESP, there is a current lifetime contribution maximum of $50,000 per child. Based on today’s figures, this doesn’t necessarily cover the entire cost of a university degree. So if you’re in the enviable position of being able to save more towards your children’s education, consider contributing to your TFSA. The money will grow tax-free at a rate that depends on your investment choices.
Choosing between a TFSA and an RESP to save for your children’s education really comes down to your family’s financial situation and goals, as well as the chance that your child may not pursue post-secondary studies at an eligible institution.
To learn more about RESP options including grant opportunities, visit the Heritage Funds website.
You can also explore how much your child’s education may cost and how much you should save by using their simple RESP Calculator.