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.
- 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- Once the beneficiary begins to attend an eligible educational program, contributions can be withdrawn tax-free, and the plan income, plus grants and bonds, can be paid out and taxed to the student.
- 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- Funds can be withdrawn at any time for any purpose.
- Withdrawn amounts can be re-invested inside a TFSA without penalty as contribution room is regained in the following year.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