Canadian families have various choices when it comes to saving money for future use. Two of these are Registered Education Savings Plans (heritage education funds RESPs) and Tax-Free savings Accounts (TFSA).
When deciding where to use the money, parents invariably choose education for their children. Between RESPs and TFSA, which one can better satisfy this purpose?
Tax-Free Contribution Growth
The contributions to both RESPs and TFSAs grow tax-free since both of them use after-tax income. However, withdrawals are treated differently.
• You don’t generally have to pay any taxes on TFSA withdrawals.
• On the other hand, RESP withdrawals have student-rate taxes.
The second is often easy to manage since most students are in lower tax brackets as they are pursuing post-secondary education.
RESPs are better with government grants.
There’s an added opportunity to boost your savings with grants in the case of RESPs, which may be eligible for grants such as Canada Learning Bonds (CLBs) and Canada Education Savings Grants (CESG).
Canada Learning Bonds
These are grants given by the Canadian government on top of your contributions to the heritage RESP account . You can get as much as $2,000 without affecting other grants or funds. As long as your child is eligible for the grant, you can request for a CLB.
Canada Education Savings Grants
Just like CLBs, these are grants given by the government. Here are the key points to CESGs:
• The government can give you up to $500 (per child, you have a family RESP account), which you can invest for compounding growth.
• A CESG is an automatic 20% match of your RESP contribution.
• You can receive $500 per year, or $7,200 lifetime.
Bear in mind that if your child decides he or she doesn’t want to pursue a post-secondary education and you decide to break the account, you have to surrender the grants to the government.
This is where TFSAs take the win.
Since the funds accumulated in TFSAs are not dedicated to educational expense, meaning you can use them for any type of savings, the money can still be given to the child, who can spend it for something aside from education.
TFSAs may trigger overspending.
TFSAs are simple and easy to set up, unlike RESPs. They’re also more flexible when it comes to taxation. Banks, online trading platforms, financial institutions, and credit unions almost always offer TFSAs as well.
But this simplicity can be a disadvantage too. Because they’re easy to access, a person may be tempted to spend it on things other than education and other important matter. RESP funds are generally dedicated to educational expenses.
Investing in both RESPs and TFSAs
There isn’t an annual contribution limit for an heritage RESP. However, there is a current lifetime contribution ($50,000 max per child). Given the current rate of expenses, this amount may not tide your child over until he graduates.
If it all comes down to cases, the biggest factor you’ll have to consider is your family’s financial situation and goals. If you think you have enough money to save with both RESPs and TFSAs, go for it.