As a parent, you want what’s best for your child. You do that by helping your children in many ways. You teach them how to ride a bike, attend their school recitals and help them save for post-secondary education. While all of these can be considered important life experiences, the last one can seem daunting. Thankfully, you’re not alone.
There are two popular ways to save towards your child’s post-secondary education costs: the Tax-Free Savings Account (TFSA) and Registered Education Savings Plan (RESP). Each have their advantages and disadvantages. Let’s look at both of them in-depth now.
Tax-Free Savings Account (TFSA)
The TFSA is tax-sheltered account that lets your money grow, as the name suggests, tax-free. You’ll never have to pay income tax on money that you earn in the TFSA, not even when you withdraw the funds. You can hold a variety of investments inside your TFSA, including savings accounts, bonds, stocks, mutual funds and ETFs.
When contributing to the TFSA like any other tax-sheltered account, it’s important to make sure you’re following the rules. There’s a limit to how much money you can contribute to the TFSA each year. In 2019, the TFSA contribution limit is $6,000 and any room that you’re not currently using is carried forward from previous years.
What makes the TFSA great is that it’s super flexible? If your child decides not to go to college or university, you could use the funds towards something else like the down payment on home, a family vacation or whatever else you like.
The one major drawback about the TFSA is that it doesn’t attract the 20 percent government grant, so in most cases you’re better contributing to the RESP first, although the TFSA can be a great place to save for your child’s education if you’ve maxed out their RESP.
Registered Education Savings Plan (RESP)
Unlike the TFSA, which is best described as a multi-purpose savings account, the RESP is an account specifically designed for saving towards your child’s higher education.
The RESP is similar to the TFSA in many ways. You can hold many investment types inside the RESP, including savings accounts, bonds, stocks, mutual funds and ETFs. The investments grow tax-free inside the RESP. (You do have to pay tax when the money is withdrawn, although it’s taxed in the hands of your child.) Since your child usually has little to no income when they’re going to school, they likely won’t have to pay any income tax.
The major advantage of an RESP is that it attracts a 20 percent government grant. That’s the equivalent of a 20 percent risk-free return on your money. Not bad! If you contribute $2,500 per year to your child’s RESP, your child will receive the full $500 Canada Education Savings (CESG).
The RESP also has a lifetime contribution limit of $50,000. While that should be plenty for most, if your child is attending an Ivy League School, $50,000 may not be enough.
No matter what account you choose, just know that by helping your child save for school, you’re already doing a great thing to help provide them with a brighter future.