Is an RESP the Best Choice for Education Savings?
When saving for post-secondary school, RESPs are hard to beat. While other saving options exist, it is extremely difficult to match the benefits of government grants, tax-deferred savings, and secured growth that RESPs offer. Let’s look at a couple of other options to see how they stack up.
RESP vs. TFSA
A Tax Free Savings Account (TFSA) enables tax-free growth of money you’ve saved for any purpose, including your child’s education. The main benefit of a TFSA is its flexibility: if you want to take some of the money out of your education savings to use for something else, it’s easy to do. The downsides of using a TFSA for education savings are, however, considerable.
First off, by using a TFSA, you lose the substantial amount of grant money associated with RESPs and your savings are likely to grow at a much more conservative rate. Also, the investment income derived from your RESP is rarely taxed when withdrawn strategically, which further negates the value of TFSAs. While TFSAs may be a suitable option once you’ve met your $50,000 threshold in your RESP, history shows that it pales in comparison to the return on investment you receive from an RESP, when you factor in government grants.
Learn More about RESP vs. TFSA
RESP vs. Investment Accounts
Asking yourself whether you could get a better rate of return by using other investment vehicles is understandable, especially if you’re a savvy investor. One might think that creating an in-trust account or formal trust might lead to optimal returns; however, several downsides to this approach exist.
First, let’s understand that Embark manages your RESP with the utmost care, providing a competitive rate of return while safeguarding your savings for their intended purpose: your child’s education. Second, non-RESP investments do not receive government grant subsidies, which could cost you up to $7,200 in lost savings. Third, to allow non-RESP investment income to grow tax-free, you would need to open your investment accounts in your child’s name (which could lead to misuse of funds once they turn 18) or create a complex legal structure to govern the use of funds. As with a TFSA, in almost all cases, investors are best suited to maximize their RESP contributions before exploring other options.
Contribution Matching
No matter how much you have to save, the government will top-up your savings by 20% or more to help you save for your child’s education.
Skip the Taxes
When your investments grow within an RESP, they grow exponentially and without taxation until they are withdrawn. In most cases, the investment income is not taxed at all when withdrawn strategically.
Save on Your Schedule
We know that the best savings plan is one that fits within your budget – even as it fluctuates. While it’s always best to start early and contribute often, our RESP provides optimal flexibility, allowing your RESP to respond to changes in your circumstances.
Contribution Matching
No matter how much you have to save, the government will top-up your savings by 20% or more to help you save for your child’s education.
Skip the Taxes
When your investments grow within an RESP, they grow exponentially and without taxation until they are withdrawn. In most cases, the investment income is not taxed at all when withdrawn strategically.
Save on Your Schedule
While it’s always best to start early and contribute often, our RESP provides optimal flexibility, allowing your RESP to respond to changes in your circumstances.
Embark is Canada’s education savings and planning company. The organization aims to help families and students along their post-secondary journeys, giving them innovative tools and advice to take hold of their bright futures and succeed.
