RESPs vs. Other Education Savings Options: Which is Right for Your Family?

Introduction

As parents, we all want our children to have the best education possible. However, the cost of education is constantly on the rise, making it difficult for parents to save enough money to pay for their child’s education. This is where Education Savings Options come in. There are several options available, including RESPs (Registered Education Savings Plans), TFSA (Tax-Free Savings Accounts), and non-registered savings accounts. In this blog post, we will discuss the pros and cons of each option and help you decide which one is right for your family.

What is an RESP?

An RESP is a savings plan designed to help parents save for their child’s post-secondary education. The government of Canada offers several incentives to encourage parents to save for their child’s education through an RESP. These incentives include the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).

The CESG is a grant that is paid into the RESP by the government. The grant is based on the contributions made by the parents and is equal to 20% of the first $2,500 contributed each year, up to a maximum of $500 per year. The CLB, on the other hand, is a bond that is paid into the RESP by the government for low-income families. The bond is worth up to $2,000 and is based on the family’s income.

Pros and Cons of RESPs

Individual Plans: An individual plan allows you to name one beneficiary who can be unrelated to the subscriber. The beneficiary can even be over 21 years old when named. With an individual plan, you have the flexibility to invest the money on your own or seek assistance from a financial advisor.

Pros:

• Non-Family Related Beneficiary: You can name anyone as the beneficiary, regardless of their relationship to you.
• Investment Flexibility: You have the freedom to choose how to invest the funds within the RESP.

Cons:

• Limited Sharing: Since individual plans focus on a single beneficiary, there is no option to share the funds among multiple beneficiaries.
• Higher Costs: Managing an individual RESP may involve higher administrative and investment costs, especially if you seek guidance from a financial advisor.

Family Plans: A family plan enables you to name one or more beneficiaries who must be related to you by blood or adoption. The beneficiaries must be under 21 years old when named. If one beneficiary decides not to pursue post-secondary education, the funds can be used by other beneficiaries. Family plans do not require regular monthly payments and provide investment options either on your own or with the guidance of a financial advisor.

Pros:

• Multiple Beneficiaries: You can include multiple beneficiaries within the same RESP, provided they are related to you.
• Flexibility for Unutilized Funds: If one beneficiary does not pursue post-secondary education, the funds can be used by other eligible beneficiaries.

Cons:

• Limited Eligibility: Family plans restrict the beneficiaries to be related to the subscriber by blood or adoption, excluding non-family members.
• Reduced Control: With multiple beneficiaries, decision-making regarding fund allocation and usage becomes more complex.

Pooled (Group) Plans or Scholarship Trusts: Pooled or group plans involve contributions from multiple families. The RESP administrator pools the contributions and invests them in assets that generate a fixed rate of return. The earnings are distributed equally among the plan’s beneficiaries in the form of scholarships while they attend post-secondary education.

Pros:

• Fixed Rate of Return: Pooled plans offer a fixed rate of return on investments, providing stability in earnings.
• Scholarship Opportunities: Beneficiaries have the chance to receive scholarships from the pooled funds during their post-secondary education.

Cons:

• Limited Control over Investments: With pooled plans, you have limited control over the investment decisions as they are managed by the RESP administrator.
• Lack of Flexibility: Pooled plans may have strict rules and eligibility criteria for accessing the funds, limiting the flexibility of fund utilization.

Overall Pros and Cons for RESPs:

Pros:

1. Tax-Deferred Growth: One of the biggest advantages of an RESP is that the growth on your investment is tax-deferred. This means that you will not have to pay taxes on the gains until you withdraw the money from the plan.

2. Government Grants: The government of Canada offers several incentives to encourage parents to save for their child’s education through an RESP. These incentives include the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).

3. Flexibility: RESPs offer a lot of flexibility when it comes to how you invest your money. You can choose from a wide range of investment options, including mutual funds, GICs, and stocks.

Cons:

1. Limited Withdrawals: There are restrictions on how much money you can withdraw from an RESP. For example, you cannot withdraw more than $5,000 in the first 13 weeks after opening the account.

2. Penalties for Non-Qualified Withdrawals: If you withdraw money from an RESP for a non-qualified expense, you will be subject to penalties. The penalties can range from 20% to 40% of the amount withdrawn.

It’s essential to carefully consider the different types of RESPs and their specific features, taking into account both the pros and cons, to determine which one aligns best with your goals and circumstances. Consulting a financial advisor can help you make an informed decision and select the most suitable RESP type for your child’s education savings.

What is a TFSA?

A TFSA is a savings account that allows you to save money tax-free. You can contribute up to $6,000 per year to your TFSA, and any gains you make on your investment are tax-free.

Pros and Cons of TFSAs

Pros:

1. Tax-Free Growth: The biggest advantage of a TFSA is that any gains you make on your investment are tax-free. This means that you will not have to pay taxes on the gains when you withdraw the money.

2. Flexibility: TFSAs offer a lot of flexibility when it comes to how you invest your money. You can choose from a wide range of investment options, including mutual funds, GICs, and stocks.

3. No Withdrawal Restrictions: Unlike RESPs, there are no restrictions on how much money you can withdraw from your TFSA. You can withdraw as much or as little as you like, at any time.

Cons:

1. No Government Grants: Unlike RESPs, there are no government grants available for TFSAs. This means that you will not receive any additional money from the government to help you save for your child’s education.

2. No Tax-Deductible Contributions: Unlike RRSPs (Registered Retirement Savings Plans), contributions to TFSAs are not tax-deductible. This means that you will not receive a tax deduction for the money you contribute to your TFSA.

3. Limited Contribution Room: There is a limit to how much you can contribute to your TFSA each year. The contribution limit for 2023 is $6,500. The cumulative limit is $88,000 since inception.

Your TFSA contribution room information can be found with Canada Revenue Agency as follows:

My Account for Individuals – Link

MyCRA Mobile Apps – Link

Tax Information Phone Service (TIPS) at 1-800-267-6999.

Non-Registered Savings Accounts

Non-registered savings accounts are simply savings accounts that are not registered with the government. You can open a non-registered savings account at any bank or financial institution.

Pros and Cons of Non-Registered Savings Accounts

Pros:

1. No Restrictions: There are no restrictions on how much money you can contribute to a non-registered savings account, and there are no restrictions on how much money you can withdraw.

2. No Fees: Non-registered savings accounts typically do not have any fees associated with them, making them a cost-effective option for saving money.

3. Easy Access: Non-registered savings accounts are very easy to access, and you can withdraw money at any time.

Cons:

1. No Tax Benefits: Unlike RESPs and TFSAs, there are no tax benefits associated with non-registered savings accounts. This means that you will have to pay taxes on any gains you make on your investment.

2. No Government Grants: Similar to TFSAs, there are no government grants available for non-registered savings accounts.

3. Low-Interest Rates: Non-registered savings accounts typically offer lower interest rates than other savings options.

Additional Education Savings Options:

Scholarships, Grants, and Bursaries: Scholarships, grants, and bursaries are financial aids awarded to students based on academic achievements, skills, or financial need. These options can significantly reduce the burden of education costs.

Here is a list of Canadian resources for scholarships, grants, and bursaries:

1. Government of Canada Scholarships and Grants: The Government of Canada offers various scholarship and grant programs for Canadian students. You can visit the official website of the Government of Canada or the Canada Student Grants and Scholarships page for more information: Government of Canada Scholarships
2. Universities and Colleges: Most universities and colleges in Canada have their own scholarship, grant, and bursary programs for their students. Check with the financial aid or student services office of the specific institution you are interested in attending.
3. Provincial and Territorial Student Aid Programs: Each province and territory in Canada has its own student aid program that provides scholarships, grants, and bursaries. Examples include the Ontario Student Assistance Program (OSAP) in Ontario and the Alberta Student Aid in Alberta. You can visit the official website of the Government of Canada for more information: Provincial and Territorial Student Aid Programs
4. Financial Institutions: Some banks and financial institutions in Canada offer scholarships, grants, and bursaries to students. Contact your local bank or explore their websites to find out more about the opportunities they provide.
5. Professional Associations and Organizations: Many professional associations and organizations in Canada offer scholarships and grants to students pursuing specific fields of study. These can include associations related to engineering, nursing, business, and more. Research associations related to your area of interest to see if they offer any financial aid programs.
6. Non-Profit Organizations and Foundations: Various non-profit organizations and foundations in Canada provide scholarships, grants, and bursaries to students. Examples include the Terry Fox Humanitarian Award and the Canada Millennium Scholarship Foundation.
7. Community and Local Organizations: Local community organizations, clubs, and foundations often offer scholarships and bursaries to students in their community. Check with community centers, Rotary clubs, or other local organizations to see if they have any available opportunities.
8. Online Scholarship Databases: There are several online databases and platforms that compile information on scholarships, grants, and bursaries available to Canadian students. Some popular ones include ScholarshipsCanada, Yconic, and Student Awards.

Remember to thoroughly research and review the eligibility criteria, application deadlines, and requirements for each scholarship, grant, or bursary you are interested in. Additionally, check for any specific application procedures and submission instructions.

Which Option is Right for Your Family?

Choosing the right education savings option for your family will depend on several factors, including your financial situation, your investment goals, and your investment style. Here are some things to consider when choosing the right option for your family:

1. Your Risk Tolerance: If you are comfortable taking on more risk, you may want to consider investing in stocks or mutual funds through an RESP or TFSA. If you are more risk-averse, you may want to consider a non-registered savings account or a GIC.

2. Your Time Horizon: If you have a long time horizon, you may want to consider investing in stocks or mutual funds through an RESP or TFSA. If you have a shorter time horizon, you may want to consider a non-registered savings account or a GIC.

3. Government Grants: If you want to take advantage of the government grants available for education savings, you will need to open an RESP.

4. Tax Benefits: If you want to take advantage of tax benefits, you will need to open an RESP or a TFSA.

Conclusion

In conclusion, there are several education savings options available, including RESPs, TFSAs, and non-registered savings accounts. Each option has its own pros and cons, and it is important to choose the right option for your family based on your financial situation, your investment goals, and your investment style. Before making a decision, be sure to do your research and talk to a financial advisor.

Additional Resources:

Government of Canada – Registered Education Savings Plans (RESPs) – The official website provides detailed information about RESP contributions, eligibility, and government grants, ensuring you have the most up-to-date information.

Wealth Solutions Hub: Education Planning – RESP is a valuable resource that provides comprehensive information and guidance on Registered Education Savings Plans (RESPs). It offers insights into the benefits, eligibility criteria, investment options, and strategies for maximizing education savings through RESPs. Whether you’re a parent, guardian, or student planning for higher education, this resource can help you make informed decisions and navigate the complexities of RESP planning.