I was having a conversation with a prospective client the other day and among other things, the subject of a RESP for his one-year-old son came up. I was shocked when he said, “Joey, my investment guy said that it is better to save for education in a TFSA because you have more control of how the funds are used, just in case my son does not pursue post-secondary education.” I thought, wow, I must investigate this a little further and see exactly what percentage of high school graduates do pursue post-secondary education. According to Census Canada:
- 66% of high school graduates go to university with an average cost between $48k – $96k for a four-year degree program
- 25% have a diploma or certificate from a program two years or less costing between $13k – $20k
According to this census, roughly about 10% of high school graduates don’t pursue post-secondary education, so the chance that your child will fall in this statistic is very low. Do you want to take this risk? As you can see, about 90% of high school graduates will pursue some form of education or training but the cost is challenging and may even deter some from valuable post-secondary education. Students will need family help so that they do not incur extra debt. So, once you have decided to help save for your child’s post-secondary education, what are your options?
Comparing TFSA’s and RESP’s
TFSA – Anyone 18 years of age or older, with a SIN number and who is a resident of Canada can open a TFSA with an annual limit of $6500 for 2023 or a total deposit of $88,000 to date. Here are the characteristics of a TFSA:
- After-tax money goes in
- Growth on this money is tax free
- Any money withdrawn is tax free
- Withdrawals can be put back into the TFSA after January 1 of the following year. The only variable is the return on your investment and you do not want to take any excessive risks, especially in the years leading up to post-secondary education needs.
If your child decides not to pursue post-secondary education, nothing is lost, you can use the money invested in the TFSA any way you see fit.
RESP – There is a contributor (person making the deposits) and a beneficiary (student). The maximum lifetime amount you can deposit for any beneficiary is $50k. The two key features of a RESP are:
Government grants and incentive programs
- Basic Grant: The government will match 20% of your deposit to a maximum of $500/year or a lifetime maximum of $7200.
- Provincial Education Grants:
- BC Education Grant: Residents of BC can apply for a one-time education grant of $1200 for their child between the age your child turns 6 until they turn 9.
- Saskatchewan Advantage Grant: Provides a 10% match/year to a maximum of $250 for residents of Saskatchewan.
- Additional Grants: There are other incentives for low to middle income families.
- An extra 10% – 20% on the first $500 of contributions depending on the parents annual combined income.
The money inside the plan grows tax sheltered
- Original contributions come out tax free
- Grant and growth income is taxed to the student
- Most students’ income is so low there are no tax implications at withdrawal.
If you think about it, with a RESP you are getting a minimum 20% return on your money immediately with no risk right away. To match this return, your TFSA would have to generate a return of 6% per year for 3 years! The only other variable is the rate of return on this money, just like a TSFA.
Drilling down to the basics, tax implications will most likely be the same (no tax), but the RESP provides an instantaneous 20% minimum return on your money. I don’t know about you, but free money from the government isn’t something that comes around every day. I’ll take it.
What if my child doesn’t go to post-secondary school?
If your child decides not to get post-secondary education right away, there are options.
- You can wait over 10 years for them to change their mind or you can collapse the plan in which case the government grants and incentives will have to be returned.
- Your original contributions can be withdrawn with no tax implications. The growth portion can be transferred into your RRSP, if you have contribution room, or withdrawn.
- You can transfer the funds to another child.
Wrapping up
In conclusion, saving for your child’s education must be a hybrid plan. Max out the RESP contributions of $2500/year to max out all the government incentives which gives the instant 20% return on your investment and the tax savings at withdrawal. Once RESP grants are maximized, deposit the rest into a TSFA to invest and use as you see fit.
If you have questions or concerns about your child’s RESP, please reach out to one of our highly qualified Connect Wealth Advisors.
