Introduction to Saving for Education
The registered educational savings plan (RESP) has been around for almost 50 years, helping Canadian parents, grandparents, and legal guardians save for a child’s post-secondary education. Since its introduction in 1974, the government has created other accounts, such as the tax-free savings account (TFSA), and many banks have introduced high-interest savings accounts (HISA). With all these options, it’s natural to wonder if an RESP is still the best way to save for your child’s education.
The Rising Cost of Education
The cost of tuition is steep and continues to rise. For the 2024/2025 school year, the average tuition fee in Canada for domestic students was $7,360, not including expenses like textbooks, accommodations, meals, and transportation. With the cost of living increasing across Canada, families are concerned about the best ways to save and make every dollar count, especially when it comes to putting money aside for their child’s education.
Starting to Save
As with any investment, it’s beneficial to start as soon as possible. Families can set themselves up for success by starting to save while their children are young, even if they’re still in diapers. If you have an older child and are just starting to save, don’t worry – this information is still relevant for you.
Option 1: Registered Educational Savings Plan (RESP)
An RESP is the only account specifically designed to help families save for post-secondary education. It’s a registered account, meaning the federal government regulates it, and the money and investments within it grow tax-free over time. When you withdraw funds from the account, they’re taxed in the hands of the beneficiary, often resulting in little to no taxes on your savings.
Another significant benefit is that it’s the only account where you can receive government subsidies – essentially free money for your child’s education – if you plan your contributions correctly. The Canada Education Savings Grant (CESG) matches 20% (up to $500 in a given year) of your first $36,000. For each child, the maximum CESG is $7,200. Families with low incomes are eligible for an additional $2,000 through the Canada Learning Bond (CLB), and parents in British Columbia and Quebec have access to additional grants.
With an RESP, each child has a maximum contribution limit of $50,000. However, due to government subsidies and investment income, the account can grow far beyond this limit by the 35th anniversary of the plan. If you have multiple children, you can open a family plan and combine and share funds between them as needed. If your children don’t attend school, you can transfer your RESP assets to your RRSP (except for the grants, which return to the government) if you have contribution room.
Option 2: Registered Retirement Savings Plan (RRSP)
An RRSP is a different type of registered account that encourages Canadians to save for retirement. Your RRSP contributions are deducted from your taxable income, and your savings and investments can grow tax-free within the account until you withdraw them. For most Canadians, this is during retirement when they’re in a lower tax bracket.
Comparison and Conclusion
When deciding between an RESP and other savings options, consider your financial goals and priorities. If you’re specifically saving for your child’s education, an RESP offers unique benefits, such as government subsidies and tax-free growth. However, if you’re looking for a more flexible savings option or are saving for other goals, such as retirement, you may want to consider alternative accounts like an RRSP or TFSA. Ultimately, the key to successful saving is to start early, be consistent, and make informed decisions about the best accounts for your needs. By doing so, you can help ensure your child’s educational future is secure and achieve your long-term financial goals.