Education saving: Balancing RESP with TFSA

With the start of the school year just around the corner, many Canadian parents are tapping into the education funds that they set aside for their children. Until this year, probably the best way to save for post-secondary expenses was the RESP, but with the advent of the TFSA in January, there’s a new kid on campus.

“Whether post-secondary education is years away or just around the corner, TFSAs and RESPs both offer relative advantages which vary depending upon the contributor’s situation,” says Jamie Golombek, managing director of tax and estate planning for CIBC.

“When determining which registered savings plan will be most beneficial it’s vital to factor in your tax rate, liquidity needs, your timeline and the level of education the student will likely pursue.”

Perhaps the best reason to take the RESP route is the availability of the Canada Education Savings Grants (CESGs), which provides up to $500 per year, based on a $2,500 contribution at 20%.

“Parents should generally contribute the maximum amount when possible to their child’s RESP to maximize the CESGs),” Golombek says.

In 2008, the government eliminated the annual contribution limit on RESPs, replacing it with a lifetime maximum of $50,000 per child.

If the child does not go on to post-secondary education, the parents can reclaim the contributions without tax consequences since the contributions are not tax-deductible in the first place. Better still, additional assets generated by investments can be rolled over into the parents’ RRSP if they have unused contribution space.

The TFSA is similar to the RESP in that contributions are made with after-tax dollars, but it allows far more flexibility, as the proceeds need not be earmarked for educational purposes.

“Investors are free from many of the rules and restrictions that apply to other registered savings plans,” says Golombek.

The TFSA also allows the parent to withdraw the cash with no additional tax planning considerations. Payouts from the RESP must be taken as education assistance payments by the student, and the money is taxed in their hands.

A useful strategy may be to contribute $2,500 to a RESP to receive the maximum CESG, and then max out the TFSA contribution limit.

The most important part of any education saving strategy, however, is to get started early. For the advisor, this means keeping up-to-date on any additions to a client’s family, and recommending the right strategy for their personal situation.

For case studies on maximizing RESP and TFSA strategies, click here.

(09/03/09)