If information is power, then education is empowerment.
With the rising costs of education and living, along with the rapid pace of technological change, parents and grandparents are searching for every possible way to secure their child’s or grandchild’s financial future. Among the many choices available, the decision eventually comes down to three options: the RESP, the TFSA, and ChildPlan™. Choosing the best education savings plan for your child’s future isn’t always straightforward or simple. In this blog, we’ll explore these three: the RESP, Canada’s long-standing education savings tool since 1998; the Tax-Free Savings Account (TFSA), currently one of the most popular savings vehicles in Canada; and ChildPlan™, the only tax-free education savings plan specifically designed for children in Canada, offering benefits that go beyond just education.
What is a RESP?
The Registered Education Savings Plan (RESP) is a government-managed education savings plan, created to help parents save for their children’s post-secondary education. One of the primary benefits of an RESP is the Canada Education Savings Grant (CESG), where the government matches a portion of parents’ deposits, providing additional support for education savings.
Advantages of an RESP in Canada
- Government matching contributions (CESG):
One of the only benefits of an RESP is the Canada Education Savings Grant (CESG), where the government matches 20% of your contributions up to a maximum of $500 per year. For example, contributing $2,500 annually will earn the maximum $500 in CESG grants, contributing $2,000 annually will earn $400 in CESG grants. The government contribution is a key incentive for Canadian parents saving for their children’s education. - Tax-deferred growth in an RESP:
RESPs provide tax-deferred growth, meaning the funds grow without being taxed until they are withdrawn for your child’s education. This allows for growth over time without having to pay taxes on gains or interest. However, unlike a Tax-Free Savings Account (TFSA), RESP withdrawals are subject to tax when withdrawn for educational expenses.
Disadvantages of an RESP for parents
- CESG grant cap limitations:
The CESG grants have a lifetime maximum of $7,200 per child, and the grants stop once you reach $36,000 in contributions and your child reaches the age of 18. This means that beyond this contribution amount and when your child reaches 18, you will no longer receive the 20% matching grant and you can’t contribute any more funds, even though your RESP account can continue growing. - Investment risks in an RESP:
RESPs are subject to market risk, meaning any growth of your account depends on the performance of your investment choices, which may fluctuate. The risk of loss is a consideration, as RESP returns are not guaranteed, and it’s essential to choose investments carefully to manage this risk. - Limited use of RESP funds:
RESP funds can only be used for qualified educational expenses, such as tuition, books, and supplies, at government-approved institutions. If your child chooses a non-approved institution or a different path, the RESP funds cannot be used, you will be required to close the account and may face penalties. - Withdrawal restrictions for RESP funds:
You can only withdraw RESP funds for Government approved qualified education institutions. To withdraw funds, you must provide proof of enrollment from an accredited educational institution to the bank or other RESP promoter. If the funds are used for other purposes, you may incur penalties and taxes. - Contribution limits:
While the lifetime contribution limit for an RESP is $50,000 per child, the matching CESG grants stop once the contribution reaches $36,000. Contributions above this threshold will not receive any additional CESG. - Penalties if RESP funds are not used for education:
If your child does not attend a government-approved institution, you’ll need to close the RESP. While the principal contributions can be withdrawn tax-free, any government grants must be returned. Additionally, any gains made in the RESP are subject to both taxes and a 20% penalty if used for non-educational purposes. (source: Managing the Registered Education Savings Plan, taxes and transfers).
Conclusion: is an RESP the best education savings plan for your child?
An RESP can be a powerful tool for parents saving for their children’s education, especially with the Canada Education Savings Grant providing a government match. However, the restrictions and potential penalties should be considered since at the time you open an RESP your child is only a baby and you don’t know what their choices will be when they’re 18. Understanding these RESP benefits and drawbacks will help you make the best choice for your child’s future education funding.
What is a TFSA (Tax-Free Savings Account) in Canada?
The Tax-Free Savings Account (TFSA) is the most popular tax-sheltered investment accounts in Canada. Introduced in 2009, the TFSA allows Canadians aged 18 and over to grow their savings tax-free, with no tax on interest, dividends, or capital gains earned within the account. This makes it an ideal tool for long-term savings and wealth building.
You can contribute to a TFSA on behalf of your adult child, but the account can’t be opened until they turn 18 years old. While you are using the TFSA to fund your chld’s future education you can’t give your child the funds until the age of 18. One of the best features of a TFSA is contributions can be invested in various assets, including GICs, stocks, bonds, and other investment vehicles and will grow completely tax-free.
Advantages of using a TFSA for education savings
- Tax-Free growth:
One of the biggest advantages of a Tax-Free Savings Account (TFSA) is the tax-free growth of gains made within the account. This feature makes the TFSA an excellent tool for long-term savings and wealth accumulation including as an education savings plan for your child. - Unrestricted withdrawals:
TFSAs offer flexibility as there are no limits on how much you can withdraw, or when or whatever your child’s education choices are. Unlike other savings accounts, you can withdraw money from your TFSA at any time without facing penalties. - Tax-free withdrawals for education:
Withdrawals made from a TFSA for education savings are tax-free, meaning you don’t have to pay any tax on the funds used for your child’s education. This feature makes the TFSA an attractive option for saving for a child’s future educational expenses.
Disadvantages of using a TFSA for education savings
- Age requirement:
The one big disadvantage is that to open a TFSA, your child must be over 18. Therefore, parents and grandparents cannot open a TFSA on behalf of a child or grandchild, limiting the account’s accessibility for those under 18. - No government matching:
Unlike the RESP, TFSAs do not receive any government CESG matching grants. While the RESP provides grants from the Canadian government, the TFSA does not offer such incentives. - Potential impact on retirement savings:
Using a TFSA for your child’s education savings could impact your retirement savings. When funds are withdrawn from a TFSA for education, those funds are no longer available for retirement purposes and all the growth over the 18 years is also gone, which could affect parents’ long-term financial goals. According to 2020 data, Canadians held $428.3 billion in TFSAs, mostly for retirement savings. (source: Canadians still underusing TFSAs).
What is ChildPlan™ Participating Whole Life insurance?
ChildPlan™ is a unique participating whole life insurance policy tailored specifically for children. This policy provides your child lifetime insurance coverage and also serves as a tax-free savings plan similar to a TFSA. With ChildPlan™, your child can benefit from both financial security in life and tax-free growth, which can be used in the future for any education or education expenses without Government restrictions, including purchasing a home, or covering other major life costs.
This policy allows cash value growth to accumulate in a tax-sheltered account within the policy and grow over time, providing a financial foundation that will help support your child’s future education and any needs and aspirations.
Advantages of ChildPlan™ as an Education Savings Plan
- Lifetime tax-free growth:
The cash value in ChildPlan™ grows tax-free for life, unlike the Registered Education Savings Plan (RESP), which only grows until age 18. This makes ChildPlan ideal for long-term tax-free savings for your child. - No market risk:
ChildPlan™ is not invested in the stock market, meaning your savings are shielded from economic fluctuations and stock market volatility. This ensures stability and protection of your child’s financial future from market risk. - Annual dividends for life:
The cash value in ChildPlan™ grows through annual tax-free dividends, which are deposited every year throughout your child’s life by a Canadian life insurance company, enhancing financial security and growth potential. - Freedom on education choices:
Unlike RESP funds, which have government restrictions, ChildPlan™ cash value can be used for any educational institution worldwide, with no government approvals needed. This flexibility allows your child to choose from global education options. - Flexible financial use beyond education:
If your child decides to pursue a different path other than a formal education such as skills trade or other future educational options, ChildPlan™ funds can be used for other financial goals, like buying a home or other significant life expenses.
Disadvantages of ChildPlan™
- Monthly premiums:
Regular premiums are required to maintain the plan, making it a long-term financial commitment. However, ChildPlan™ is fully funded after 20 years, after which no further deposits are necessary and the cash value will continue to grow for life, even if your child uses their plan to buy a home or for other financial needs. - Not suitable for immediate use:
The cash value in ChildPlan™ grows over time, making it a long-term investment rather than an option for immediate cash access.
Choosing the best education savings plan for your child's future
Each education savings option—TFSA, RESP, and ChildPlan™—offers unique benefits:
- TFSA: Provides maximum flexibility, though using it for education might impact retirement savings.
- RESP: Offers government grants and tax-deferred growth but limits your child’s educational choices.
- ChildPlan™: Delivers stable, long-term growth with no restrictions on education, making it a strong alternative for building a secure financial future.
Consider your financial goals and consult a licensed advisor to make an informed decision for your child’s future.
Remember: “Information is power. Education is empowerment.”
