I know I should start investing in my children’s future, but am not sure where to put my money. What’s the difference between a Tax Free Savings Account (TFSA) and a Registered Education Savings Plan (RESP) (and which one should I invest in)?
Rachel F. emailed us at expert@sweetspot.ca, and financial expert Lee Anne Davies from RBC answered;
We have so many competing priorities for our money, and saving for education is one of the top priorities of many families. Registered Education Savings Plans (RESPs) provide parents, grandparents, relatives and friends a tax-effective way of saving for a child’s post-secondary education. A wide variety of investments can be used within an RESP. These plans make great gifts, not only for your own children but also for grandchildren, nieces, nephews or family friends. All the income earned in an RESP can accumulate tax-free until it’s withdrawn for educational purposes. Any other purposes for withdrawal will not be tax-free.
In addition to the tax-deferred growth, RESPs offer investors government funding through the Canada Education Savings Grant (CESG), which boosts the savings power of each dollar invested by 20 per cent up to an annual maximum of $500.
A Tax-Free Savings Account (TFSA) has flexibility, since there are no restrictions. Funds can be withdrawn at any time, tax-free, for any cause, allowing parents to use TFSA money for a variety of reasons. A TFSA can also be used by parents who have already contributed the maximum amount to their child's RESP to achieve the $500 CESG and are looking to invest an additional $5,000 annually towards education in a tax-advantaged way.
Determining what registered investment plan is right for you depends on the individual and what their financial goals are. Both offer the advantage of seeing your money compound over time and grow tax-free. A financial adviser can help you select the right plan. No matter which investment plan you choose, the key is to start investing early and regularly to help ensure the financial security of your child’s future education.
As head of retirement strategies at RBC, Lee Anne Davies leads the strategic direction, development and implementation of Your Future By Design, RBC’s distinctive approach to helping clients create a blueprint for a successful lifestyle and financial plan for retirement.
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