RESP vs. TFSA

With the cost of postsecondary education as high as it is (and climbing every year), saving for your child's education is something you want to start as early as possible. In Canada, there are two types of registered accounts you can use to save for your child’s education: The Tax-Free Savings Account (TFSA), and the Registered Education Savings Plan (RESP). But which one should you use? Let's compare the TFSA vs. RESP.

What’s a RESP? How is it different from a TFSA?

A Tax-Free Savings Account, or TFSA, is a registered account you can use to invest your money over the long-term. When you invest using a TFSA, any interest or investment income you earn is tax-free. You can take your money out at any time and use it for anything you want.

A Registered Education Savings Plan, or RESP, is a registered account specifically intended for saving for a child's education. The person who opens the account, also called the sponsor, can contribute money and direct how it's invested. The child, or beneficiary, can later withdraw money from the account when they attend university, college, or any other recognized post-secondary education.

Who can contribute to an RESP account or TFSA? What is the RESP vs. TFSA age requirement?

Any Canadian over the age of 18 can open a TFSA. You don't need to have any employment incomes or have paid any taxes. You can keep your TFSA for as long as you live.

Likewise, any Canadian can open an RESP provided the named beneficiary is under the age of 21. You don't have to be a parent or legal guardian to open an RESP; you can start in RESP for a grandchild, niece or nephew, or family friend. RESP accounts can stay open for a maximum of 35 years.

RESP Contribution limits vs. TFSA contribution limits

The amount you can contribute to a TFSA depends on how old you are. You start earning contribution room in the year you turn 18, and additional contribution room becomes available to you each year after that. Unused contribution room can be carried forward and contribution room is returned to you in the year after you make a withdrawal. We've listed total limits - by birth year - below, but you can also find your personal limit with Ratehub's TFSA contribution limit calculator.

Total TFSA contribution limit based on the year you were born

Each RESP beneficiary is limited to a total of $50,000 in contributions across all RESPs in their name during their lifetime. Grant money does not count toward the contribution limit, and contribution room is not given back after withdrawals are made. RESP contributions can only be made in the first 31 years the account is open.

How do RESPs work vs. a TFSA? How does the money grow? 

When you contribute to your TFSA, you can invest your money in many different ways. You can buy stocks, bonds, ETFs, mutual funds, GICs and similar investments. You can also use your TFSA to open a standard high interest savings account.

When you sponsor an RESP, you can invest your contributions in much the same way. You can also earn grant money based on the amount you contribute and the beneficiary’s economic status. Available grants include:

• The Canada Education Savings Grant (CESG), which tops up contributions by 20% to 40% to a maximum of $600 per year and $7,200 lifetime for each RESP beneficiary.
• The Canada Learning Bond (CLB), which contributes up to $2,000 for children from low-income families.
• The Quebec Education Savings incentive (QESI), which is available to residents of Quebec and matches contributions by 10% to a maximum of $3,600 per child.
• The BC Training and Education Savings Grant, which is available to residents of BC and contributes $1,200 to eligible children between the ages of 6 and 9.

Note that an RESP grant previously offered by the province of Saskatchewan was discontinued in 2018.

Who can withdraw from an RESP vs. TFSA?

When you save money in a TFSA, only you can take that money out. However, you're free to give money to anyone for any reason without incurring any taxes. If you withdraw from your TFSA to pay for your child's education, you may be able to deduct some of your expenses on your income taxes.

When an RESP beneficiary is enrolled in a qualifying postsecondary education program, both they and the plan’s sponsor may withdraw money from the account without penalty. As the RESP’s sponsor you may withdraw your contributions at any time, but all grants will be repaid to the government and contribution room will not be returned. It’s meant strictly for your child’s education, you can’t stand to benefit from the grants unless you use it for education. 

RESP withdrawal rules vs. TFSA

Taking money out of your TFSA is easy. You can withdraw as much as you like, you don't have to report it on your taxes, and you can use it for whatever you want.

RESPS, however, are subject to some rules when it comes to withdrawals. Beneficiaries may only withdraw $5,000 in their first 13 weeks of full-time schooling or $2,500 in their first 13 weeks of part-time schooling. After that, they can withdraw as much as they want as long as they continue to be enrolled in a qualifying program. There are provisions that allow for beneficiaries to make larger withdrawals in some circumstances, and the RESP's sponsor can also make withdrawals without penalty as long as the beneficiary is going to school.

Taxes RESP vs. TFSA

Ordinarily when you earn interest or investment income, you need to pay income tax on the amount you earn from investments each year. A TFSA allows you to skip the income tax on that earned interest income in the account and grow your money tax-free.

When you use an RESP, you’re also spared from paying annual income tax on any interest, investment income or grants earned in account. However, the beneficiary will be required to pay income tax on every dollar they withdraw from their RESP. This setup is still advantageous because the student will likely have very low income while going to school and as such pay little to no tax on the amount they withdraw.

So, RESP vs. TFSA - which one to choose?

If you're saving money specifically for a child's education, an RESP is almost always the best choice. It allows you to earn grant money that's not otherwise available, and it allows you to defer taxes on any money earned in the account. The only risk is that if the beneficiary does not enroll in postsecondary education, any grant money will have to be returned.

If you wish to supplement your education savings, the TFSA may be the way to go. Because the primary advantage of an RESP is to earn grant money, and because there are limitations on how and when the money in an RESP can be used, you may choose to invest only enough in an RESP to exhaust your grant eligibility and then use your TFSA for additional savings.

Essentially, use both to max out if you can. If you have to pick one, the RESP gives you grant money for free so long as your child goes to school. 

The bottom line

When saving for a child’s education, only the RESP unlocks additional grant money – but it comes with some caveats. The money saved in an RESP can only be used for its named beneficiary to attend postsecondary education and comes with a lifetime contribution limit that may be less than you want to save.

Take full advantage of the grants available and use an RESP to save for your child’s education, and count on the TFSA as a way to save more money and keep some of your savings available where they can be used however and whenever you want.

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