It’s a complicated question without a simple answer. Let’s start with a chart comparing the highlights of the two plans:
|Reduces Tax When Contribution Made||No||No|
|No Taxes Paid While Remains in Plan||Yes||Yes|
|Tax Payable When Withdrawn||Yes – for the student||No|
|Extra Amounts from the Government||Yes||No|
|Generally Must Be Used For Education||Yes||No|
|Must be Used for Intended Original Beneficiaries||Generally yes||No|
|Easy to Use for Other Purposes||No||Yes|
|Contribution Room Ends at a Certain Age||Yes – at 18||No|
|Can Use For Another Person Including Oneself||With siblings sometimes; rarely for another person.||Yes, can use for anything, including own education.|
|Contribution Room Reduced When Withdrawn||Yes||No|
|Limits||• $50,000 per student per lifetime|
• $36,000 lifetime maximum for CESG
• $2,500-5000 annual limit for maximum CESG
• No actual annual contribution limit
|• Currently $5000-10,000 per contributor per year = potentially higher limit per student|
- With the TFSA your contribution room never goes away. Withdraw $10,000 for education and you can put it back the following calendar year.
- Usually higher overall limits with the TFSA (depending on number of children and number of contributors).
- TFSA can be used for any purpose.
- Using an RESP will result in some additional government contributions, but the TFSA will not.
- The TFSA withdrawals are never taxed.
So what is the bottom line? Which method is best? Unfortunately without a detailed analysis of your personal family situation there isn’t a clear answer for this question. A combination approach may be the most prudent for the average family.
But to try to offer some help in your decision here are some factors to consider:
A TFSA might be better if:
- Your child may prefer to skip post-secondary school and instead work or start a business after high school.
- Your child is already a teenager.
- You need flexibility in whose education you are funding, or may need to fund your own education.
- Your child may have a high income or high expenses while they are in university. (No matter how much you need to withdraw from the TFSA there won’t be tax owed whereas a high need’s student may end up paying tax on RESP withdrawals.)
An RESP might be best if:
- Your income is low and you need as much government assistance as possible.
- You might be tempted to use the educational savings for other expenses if they’re not locked-in.
- Your child is very young
Generally I recommend opening an RESP account ASAP while your child is young, and also using the TFSA program to save for any upcoming expenses you might have, including education.
Let’s hear from you. How are you saving for your child’s education? Did your parents save money for you? Were there restrictions or did they just hand over the money? How did their assistance or lack thereof help or hinder you?
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