TFSA or RESP: Which is the Better Option?

If you have a child, you probably think about putting something away for their education someday.  The harsh reality, however, is that putting a child through post-secondary education can put a significant strain on a family’s finances.  Fortunately, in Canada, the government has offered a couple of different savings avenues that can help to alleviate some of the financial burden of saving for your child’s education.

Let’s look at these two savings options in a little more detail.

Registered Education Savings Plan (RESP)

This is a tax-deferred investment, in which the government provides grants up to a maximum annual amount of $500 per child, with a maximum lifetime grant amount of $7,200.  That’s a lot of money, but it’s a drop in the bucket when you consider that it can cost upwards of $100,000 to send your child to university, including tuition, books, food, housing and other expenses.

Tax-Free Savings Account (TFSA)

These accounts are another option for saving for the future, without having to pay taxes on the amount you have stashed away.

Which of these two options is best for you is for a financial security advisor such as Robert Yancovitch to help you to decide.  There is no one right answer; it depends on your financial situation today and your goals for tomorrow.  However, there are some guiding principles that could help you to decide.

If you know you want to save money for your child’s education, an RESP could be the best choice.  Those funds must be used for education.  The funds you save in a TFSA, on the other hand, can be used by your child to pay for school, to travel, or to buy their first home.

Both of these savings plans have benefits and downfalls, says Yancovitch.

For example, the RESP offers the distinct benefit of having a 20 percent government top up, thanks to the Canadian Education Savings Grant.  Parents or other contributors can put up to $50,000 per child into the RESP until the “child” turns 31.  With the government grant, contributions to an RESP can grow relatively quickly.  Plus, it’s tax sheltered.

On the downside, if your child decides not to attend a post-secondary education, the government will take back its contribution and any growth made off of that portion.  You will only be able to withdraw the amount you put into the RESP and any money you made off of it.  Also, although the RESP contributions are sheltered from tax while it is in the account, once your child withdraws the funds they will be taxed.  This is only a minor concern in most cases, however, as most university students have little to no income to cut into their RESP funds.

A TFSA, on the other hand, provides families with more flexibility.  Parents can contribute up to $5,500 annually, and the money is more easily accessed than the funds in an RESP.  TFSAs, of course, are tax free, both in the accumulation and in the withdrawal.  On the downside, there are no government contributions to your TFSA.

Another potential downside for the TFSA is that the money is easy accessed.  But wait, we just said that was a plus, right?  Well, it could be.  But it could also be a downside, depending on your discipline as a saver.  For example, what if you, as parents, need money for something urgently?  It can be very tempting to dip into your child’s TFSA, thinking that you’ll replace the funds someday.  If you can be disciplined to keep the money in there and view it as untouchable, it can be a good investment in your child’s future.

Both the TFSA and the RESP are good options for saving for your child’s future.  The trouble is, how do you know which option to choose?  That’s where a qualified financial security advisor such as Robert Yancovitch comes in.  He can help you to decide which avenue is best for your situation.