When it comes to education savings, everyone’s financial circumstances and educational needs are very different. This is why having a variety of options is great to support the diverse needs of families across Canada. However, it can be difficult to narrow down your choices enough to make a decision. Determining your financial planning strategy can be a stressful endeavour!
One of the biggest challenges that families tend to face is choosing between an RESP or a TFSA. An RESP, or Registered Education Savings Plan, is a registered account that is used specifically for saving for a child’s education. A TFSA, or Tax-Free Savings account, is a registered account that is used to invest money for general purposes over the long-term.
Which is best for you, and for the future of your child? Which is the best when saving for a child’s education? Let’s compare in this article.
What is an RESP (Registered Education Savings Plan)?
An RESP is an account that’s specifically designed to save for a child’s post secondary education. In Canada, the average cost of a 4-year university spikes to upwards of $95,000 for students living in residence. According to Statistics Canada, the average household income in Canada was predicted to be around $68,400 in 2021 – so that’s quite the gap.
The person who opens the RESP, also called the subscriber, may contribute money towards a child’s education savings to help plan for this. The beneficiary, usually a child or grandchild, may later withdraw this money from the account when they choose to attend college, university, or any post-secondary that is considered “recognized”. RESP beneficiaries are limited to a total of $50,000 in contributions – across all RESPs – in their lifetime. Note, however, that grants and investment income do not count towards their contribution limit.
What is a TFSA (Tax-Free Savings Account)?
A Tax-Free Savings Account, or TFSA, is used to invest money over a long period of time. When money is invested into a TFSA, whatever investment income or interest ends up being earned is tax-free. With a TFSA, you may make a withdrawal at any point and use the money for anything you deem necessary. As long as you are 18 years of age or older, you can open a TFSA in Canada. You are not obligated to have an employment income or previously have paid any taxes, and your TFSA may remain open for as long as you live.
TFSA contribution limits depend on the age of the individual contributing to the account. You may begin “earning” contribution room once you turn 18, and any additional room that becomes available to you is earned per year afterwards. Any unused contribution may be pushed forward, and if you make a withdrawal the contribution room is returned to you the year after.
What is the difference between TFSAs and RESPs?
There are a few differences between TFSAs and RESPs, but the biggest is the way that money grows. Both TFSAs and RESPs, allow you to invest your money in different ways, use them to house bonds, ETFs, stocks, GICs, mutual funds, and similar investments. However, when you invest in an RESP, in most cases you are also eligible to receive government grants on your contributions. This acts as a means to get more money than you otherwise would have had for simply saving for your child’s future. Through the Canada Education Savings Grant, for instance, the government will give you an extra 20% ($7,200) on your first $36,000 saved, if you contribute in a specific way. There are other grants available to families based on their household income and location, like the BC Training and Education Savings Grant, the Quebec Education Savings Incentive, and the Canada Learning Bond.
Withdrawal rules are also different. With TFSAs, you may withdraw as much as you like and do not have to report it on your taxes.
RESPs are subject to withdrawal rules, as beneficiaries may only withdraw up to $5,000 within the first 13 weeks of schooling or $2,500 in the same period, if they are part-time. After that, they can withdraw as much as they’d like so long as they are still considered eligible for withdrawals (i.e., they are still enrolled in a qualifying program).
TFSA vs RESP: FAQ’s & More
Should I open an RESP or TFSA for my child?
There are benefits to opening either a TFSA or an RESP. What you choose is highly dependent on your overall goals, what your child’s needs are, and what your financial circumstances are like.
RESPs are designed specifically for helping you save for your child’s post-secondary education, and they offer access to government grants such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). Both of these can provide additional funds to help support educational expenses for your child.
RESPs also offer tax advantages. The contributions you make to RESPs are not tax-deductible, however the investment growth is tax-deferred. If funds are withdrawn for qualifying educational purposes, they are then taxed within the hands of the beneficiary, who is assumed to have a lower income and therefore may be subject to lower tax rates.
With a TFSA, you get more flexibility. TFSAs are considered to be the more versatile savings vehicle that can also be used for saving for a child’s education, or for starting a business, rent deposit, and so much more. It permits tax-free growth and withdrawals at any time.
TFSAs also have an annual contribution limit that grows with time. TFSAs can able advantageous if you want more flexibility in using funds for reasons other than education. However, because of this flexibility, it often makes more sense to use these types of accounts for needs other than education because RESPs offer many similar advantages and provide you with more money for saving through grants.
Is there an annual contribution limit?
Yes, there is an annual contribution limit for both RESPs and TFSAs. The specific limits are determined by the Canadian government and are subject to change. TFSAs annual contribution limit accumulates with time per year of age, and the exact limit is set by the government.
RESPs have a total lifetime contribution limit of $50,000 across all RESPs in the name of the beneficiary. Keep in mind that with this, grant money and investment income does not count towards contribution limits.
What is the minimum age to contribute?
With an RESP, there is technically no minimum age required to make contributions. Anyone, whether a parent, family member, or grandparent or friend can contribute to an RESP on behalf of the beneficiary. It doesn’t matter how old the beneficiary is. Contributions may begin as soon as the account is opened. Note that while there is no minimum age to contribute to an RESP, some grants and incentives with RESPs will have specific eligibility criteria based on age and other factors.
With TFSAs, the minimum age to open and contribute to an account is 18 years old. However, once an individual reaches the minimum age, they may open and contribute to their own TFSA.
Can I transfer RESP to TFSA?
No, it is not possible to transfer an RESP to a TFSA. They are distinct accounts with separate rules. If you have funds in a TFSA and you are looking to utilize them for purposes other than education, there are a few options. You may choose to close the RESP and withdraw your funds – although you will end up incurring taxes, penalties, and a loss of grants. You may also contribute your funds to a RRSP if you have the available contribution room. To ensure you get the most out of your savings, you should consult with an Education Savings Specialist to understand the potential consequences of any transfer.
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.
