Whether your child wants to be a pilot, a chef, or an architect, you know that most great jobs start with an education. And education doesn't come for free. With rising tuition and living costs, the expenses of education are skyrocketing. That's why it’s important to start saving for education as early as possible.
In Canada, there are two popular options for education savings: the Tax-Free Savings Account (TFSA) and the Registered Education Savings Plan (RESP). Both have their own distinct benefits, and can be used in tandem to help your child's big dreams come true. Here’s what you need to know:
The tax-shelter benefits: a tie
As the saying goes, “nothing can be said to be certain, except death and taxes.” The good news is that both the TFSA and RESP allow money to grow tax-free when it’s in the plan. In other words, whether your money is in a TFSA or RESP, if you earn investment income in these plans, you don’t have to report that income, or pay tax on it. Pretty great, right?
Government grants: a unique benefit of RESPs
Only the RESP provides access to government-matching grants. The money you contribute to an RESP is matched by 20% by the government, up to $500 a year under the Canada Education Savings Grant (CESG). Over the years, the government will contribute up to a maximum of $7,200 per child in matching grants. With CST Spark, you can open an RESP with as little as $10 to start qualifying for the CESG.
There are also additional grants you might qualify for, simply for opening an RESP—even if you don’t contribute money of your own. Lower-income families are eligible for up to $2,000 per child over the course of their RESP through the Canada Learning Bond (CLB).
Plus, residents of Quebec and British Columbia may be eligible for additional provincial grants.
Contribution guidelines: different rules for different tools
The contribution limit for the TFSA in 2020 is $6,000, or up to $69,500 if you’re a first-time contributor who was 18 years or older in 2009. With the TFSA, you can contribute as much or as little as you’re able, within that contribution limit.
With the RESP, there are no annual contribution rules, but there is a lifetime contribution limit of $50,000 per child. We recommend that you contribute to an RESP in a way that maximizes government grants. That means aiming to contribute $2,500 per year, per child. The good news is that if you can’t contribute the full $2,500 in a given year, you’re allowed to catch up in a later year.
If you’re not sure how much to contribute to your RESP each year to take full advantage of government-matching grants, don’t stress. We can do the math for you. As a digitally driven, RESP-focused provider, CST Spark is available for you five days a week, by phone or live chat.
Withdrawal rules: money from either tool is there when you need it
You can withdraw money from your TFSA at any time, and you won’t be taxed on the investment income. With the RESP, it’s slightly more complicated… but don’t stop reading here because it all works out.
With the RESP, the grant and income money can be withdrawn for the beneficiary when they’re in college, university or other training. Keep in mind that unlike the TFSA, income earned in an RESP is taxable. But—and this is a big but—chances are the young adult beneficiary is making little to no income while they’re studying, which means they likely won’t have to pay any tax on the money they withdraw. Plus, they can use that RESP money to pay for tuition, books, rent and those trips to the candy store for study time energy (seriously, the RESP covers all school-related costs, even chocolate-covered almonds).
What happens if you’re lucky enough to still have funds in the RESP once the beneficiary's education is paid for? Well, you can withdraw your original contributions (of up to $50,000) tax-free! If there’s left over investment income, you’ll be taxed on that if you simply pull it out, but you can avoid the tax by moving the RESP investment income directly into your Registered Retirement Savings Account (RRSP) if you have RRSP contribution room. That’s a nice little gift to yourself for all the hard work you did saving for your child’s future.
Bottom line? Both the RESP and TFSA have advantages
Both the RESP and TFSA offer great education savings advantages. At CST Spark, we recommend our clients start their education savings by contributing $2,500 a year to an RESP, to qualify for the 20% matching grant from the government. If you can put aside additional monies beyond the $2,500 per year or lifetime limit of $50,000, a TFSA is a great place to park this cash, because it can grow tax-free and you don’t have to worry about getting taxed on your investment income when you withdraw the money. Plus, there's no harm in saving money earmarked for education in a TFSA, because if your child doesn’t need the money for education, you could spend it on a new car, down payment or family vacation.
In other words, unlike some siblings, an RESP and TFSA can coexist peacefully. Many put education savings in both. Because seriously, why not take those tax breaks wherever you can?
Not all RESP providers are created equal.
If you haven’t opened an RESP yet, apply today! CST Spark makes it easy to open your plan, make changes to it, or ask us any questions from the comfort of, well, anywhere. You can’t know what your child’s future path will look like, but you can know for certain that you’ll never regret opening an RESP to make that path a little smoother.
CST Spark Education Portfolios is sold by prospectus.
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