Saving for Your Child’s Future: 4 Comparisons between an RESP and a TSFA

With the increase in the cost of post-secondary education, Canadian parents need to think carefully when deciding whether to invest in a Tax-Free Savings Account (TFSA) or a Registered Education Savings Plan (RESP). Want to know more about these saving options? Here are a few comparisons to help you make an informed decision.

1. TFSA and RESP Contributions Grow Tax-Free
There’s no denying the fact that contributions and income earnings in both TFSA and RESP grow tax-free, but it’s a different scenario entirely when you want to get your money out. While TFSA withdrawals are tax-free, RESP withdrawals are taxed at a low interest rate. If you choose the RESP plan, this is usually a non-issue. Since most students are not income earners, they are categorized in the low tax bracket, so taxes will be low.

2. Grants
Contributions to both plans are made with after-tax income, yet a Registered Education Savings Plan offers great incentives to boost your savings. One of the benefits that an RESP has over a TSFA is that contributors qualify for government education grants like the Canada Learning Bond (CLB) and Canada Education Saving Grant (CESG). In addition to that, contributors to the heritage RESP plan may be eligible for provincial grants, particularly for those living in British Columbia, Quebec or Saskatchewan. The grants could increase your savings by up to 20%. Furthermore, this helps your educations saving grow faster than you think.

3. What If Your Child Decides Not to Attend College?
Not all kids will be inclined to pursue post-secondary education. Every parent’s dream is to see their child graduate from college; the reality is not all of them will. If you choose a Registered Education Savings Plan and the plan has received grant money, the government will lay claim to the funds if the child does not continue education after high school. A TSFA, on the other hand, is quite the opposite. TFSA funds may be used for any type of savings, hence parents may decide whether or not to gift the contributions to their child for their personal use other than education.

4. Withdrawing Savings at Will Leads to Overspending
Most financial institutions and online trading platforms offering TFSAs give contributors the chance to access and monitor their savings online. Moreover, this plan allows contributors to save and withdraw money to their bank accounts at will. If you don’t know how to manage funds, a TSFA may not be the best option. This is because you get to withdraw the funds as needed. One of the reasons for choosing either of these plans (TFSA or RESP) is to help secure the future of your child’s education. The purpose of saving will be defeated if you are tempted to make withdrawals from your TFSA account. Conversely, RESP funds are more difficult to withdraw. You only have access to withdraw funds when you have pressing educational needs to settle. And when it comes to withdrawal policies, the Registered Education Savings Plan is stricter, which can help you save.

Your choice between a TSFA and RESP boils down to the financial situation and goals of your family.
om the cancelled RESPS is paid out together with the matured plans. This is very advantageous especially on the parent’s side.