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Save for post-secondary school with a TFSA or RESP?

When most parents or grandparents think about saving for a child’s post-secondary education, the first option that springs to mind is placing investments in a Registered Education Savings Plan (RESP). But now, you have an additional option: A Tax-Free Savings Account (TFSA) allows you to contribute up to $10,000 annually and allows your savings to grow tax-free. Let’s take a closer look at RESPs and TFSAs.

RESPs

  • A vehicle for tax-deferred education savings.
  • Total contributions for a child cannot exceed $50,000.
  • Federal programs can add money to an RESP for contributions made for an eligible child
  • Some provinces also make education savings grants available to their residents.
  • Once the beneficiary begins to attend an eligible educational program, contributions can be withdrawn tax-free, and the plan income, plus grants and bonds, can be paid out and taxed to the student.

TFSAs

  • Contributions are not tax-deductible but invested funds grow on a tax-free basis.
  • Funds can be withdrawn at any time for any purpose.
  • Withdrawn amounts can be re-invested inside a TFSA without penalty as contribution room is regained in the following year.

Here are the hypothetical results of four different RESP/TFSA Education Savings strategies1:

  • Invest $5,000/year for 18 years in a TFSA: Value of TFSA account at end of 18 years: $163,800.
  • Invest $5,000/ year for 10 years within a TFSA then $5,000/year within an RESP account for 8 years: Value of TFSA and RESP combined at end of 18 years: $173,443.
  • Invest $5,000/year for 10 years within an RESP account then $5,000/year within a TFSA for 8 years: Value of TFSA and RESP combined at end of 18 years: $174,934.
  • Invest $2,500 each within a TFSA and RESP for 18 years: Value of TFSA and RESP account combined at end of 18 years: $178,113.

While the final totals vary, what’s best for you depends on your unique financial and life goals. Your professional advisor can help youmake the best choices.

1 Assumptions: Investment returns within an RESP and TFSA are both 6.0% (rate of return is for illustrative purposes only); lump sum annual contributions and applicable CESG are made on January 1 each year. TFSA holder is at all times 18 years or older and a resident of Canada for tax purposes. RESP beneficiary is born in the first year of the strategy, and is at all times a resident of Canada for tax purposes. The RESP receives basic CESG but no additional CESG, CLB, or provincial grants.

August 31, 2015

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.