RESP Or TFSA? A Primer On Saving For Your Child’s Education In Canada

Sep 19, 2018 | All, Family, Individuals, Investments, savings, Tax, Tax Free Savings Account

It’s easy to shut out the noise about rising tuition costs when your kids are still trying to navigate the early years of grade school. But ignoring the conversation altogether does a disservice to you further down the road.

In Canada, the average tuition cost for university – before the cost of books, travel and supplies – sat around $6,500 for the 2017-18 year rising to between $8,000 and $22,000 for higher-cost programs in medicine and law, according to Statistics Canada. Tuition has continuously been on the rise and costs 40 per cent more than it did a decade ago.

But the price tag comes with a benefit. Research from organizations like the OECD, has shown that people with a post-secondary education often out-earn, and outperform peers without some form of post-secondary education.

For a parent who sees the value, the question then becomes: what’s the best way to save for your child’s education?

RESP or TFSA or both?

When it comes to saving for your child’s education there are three options that should be considered; RRSP, TFSA or Participating Life Insurance. Each have their own pros and cons. One element that is consistent with all three is the tax-sheltered growth that all three concepts provide. Below you find brief synopsis of each of the three strategies and how they may work for you in funding your child’s education.

RESP

The RESP – a plan set up to be used specifically for education expenses. With an RESP you can contribute up to $50,000 per child. The main draw with the RESP is government-matching under the Canada Education Savings Grant (CESG) – which pays up to 20 to 40 per cent on the first $500 of annual contributions (dependent on your family income) and 20 per cent on the next $2,000. The maximum annual matching amount falls between $500 and $600 with a lifetime limit of $7,200 per child.

You pay tax on any growth from investments in the RESP and CESG when the income is withdrawn. If your child chooses not to go to school, there are ways to transfer the money to another child or into an RRSP – both of which we can help facilitate.

TFSA

Unlike the RESP, the TFSA has no stipulation over how the money can be used which makes it a solid part of a wider savings strategy for your child’s education. Suppose you want to help your child out with rent or a car to get to-and-from school? The TFSA is your vessel. The contribution limit is currently $5,500 a year, which you start earning at age 18 (since it began in 2009). You can hold all sorts of investments including mutual funds, stocks, bonds, GICs and savings, and the income is tax-free. Pulling money out of your TFSA is also tax free which makes it an attractive option for those looking for some added flexibility.

Insurance

Participating Life Insurance also known as Whole Life Insurance is a very powerful and useful financial tool to consider when putting money away for your child’s education. This strategy requires a high degree of certainty that you can fund the policy for 18 years. Purchasing $300,000 of participating life insurance at a base cost of $1955 per year, and overfunding the policy with an additional $3,261 per year, your policy will grow over 18 years to have a total cash value of approximately $124,000 with a death benefit just over $1 million. The insured can draw out $20,000 per year for four years to pay for some or all of their post secondary education and still have a fully funded life insurance policy that will have a death benefit of $500K after drawing down the policy throughout postsecondary studies. From the insured’s age of early 20s to 65, the policy will be paid for by the dividends paid out each year – that will see the policy grow to $1.1 million death benefit by age 65 with a cash value at 65 of almost $600K. This option (while more expensive) offers incredible flexibility and provides an asset that your child will have for life. As with a RESP the amounts taken out of the policy will be taxable to the child, however most students rarely find themselves owing taxes once they have filed their
return.*Note illustration used Canada Life Estate Achiever policy. This example was for illustrative purposes.

The Final Word

All three of the options above work and will be helpful in covering a portion or all of your child’s post secondary education. The solution you pick will depend on your circumstances on what approach works best for your family. To learn more about any of these three options in greater detail please book a meeting with one of our advisors from the link below.

Contact us to set up a strategy unique to your needs. 

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