RESP vs TFSA: what else should you consider?
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RESP vs TFSA: what else should you consider?

Author: Sound Choices

November 15, 2018

Education Savings:
Which registered plan should you use? Consider taxation, carry-forward, withdrawal options and age restrictions.


The content in the below article is meant for Canadian investors only.


 

Both a Registered Education Savings Plan (RESP) and a Tax-Free Savings Account (TFSA) are tax-sheltered plans – but there are important differences to consider before deciding where to put your education savings. What are the key differences and what does this mean for you?

The first part of this story  – “RESP vs TFSA: how to choose between them”– covered ownership, beneficiaries, government grants and contribution limits.


Taxation

TFSAs RESPs
  • Contribution not tax-deductible
  • Grows tax-free
  • Contributions and income earned are not subject to tax when withdrawn
  • Contribution not tax-deductible
  • Grows tax-free – government grants and income earned within the plan aren’t taxed until they are withdrawn
  • Educational Assistance Payment (EAP) Withdrawal – which consists of earnings or “accumulated income” plus the grants themselves – is taxable in the beneficiary’s hands
  • Post-Secondary Education (PSE) Withdrawal and Capital Withdrawal (no proof of enrolment) – both of which consist only of contributions (investment principal) in the RESP – are not taxed since contributions were made with after-tax dollars

Consider:

  • All the money in a TFSA can be withdrawn tax-free
  • The EAP portion of the RESP withdrawal is taxed in the hands of the beneficiary – who should be in a lower tax bracket.
  • The capital withdrawn is not subject to tax.

Carry-forward

TFSAs RESPs
  • Unused contribution room can be carried forward
  • Any withdrawals are added back to unused contribution room the next calendar year
  • No annual contribution limit to carry forward – doesn’t apply
  • Unused basic CESG (not additional CESG) can be carried forward

Consider:

  • With a TFSA, you have the flexibility to withdraw and then re-contribute that amount again the following year
  • With an RESP, withdrawn contributions are not added back to your contribution room and cannot be re-contributed
  • If you cannot make an RESP contribution in any given year, you can carry over unused Basic CESG. By contributing more than $2,500 in subsequent years, you can get up to $1,000 of Basic CESG per calendar year if unused CESG amounts are available

Withdrawals 

TFSAs RESPs
  • Tax-free
  • Generate contribution room the next calendar year
  • The EAP can be used by the beneficiary to cover any expenses while they’re in school, such as rent, transportation, etc.
  • If the beneficiary qualifies for an EAP, the subscriber can also withdraw their contributions with no consequences
  • If the beneficiary is not enrolled at the time of the withdrawal, the subscriber can request a capital withdrawal – a proportionate amount of the grant will automatically be paid to the government

Consider:

  • EAPs are limited to $5,000 in the first 13 weeks of enrolment for full-time students and $2,500 for each 13-week period of enrolment for part-time students.
  • So while, technically, a subscriber can choose to withdraw all their contributions and use them in any way – regardless of whether or not the beneficiary goes to school, if their contributions are withdrawn while the beneficiary is not eligible for an EAP, the grants received will be repaid to the government.

Age restrictions 

TFSAs RESPs
  • Minimum age: 18
  • No maximum age
  • No minimum or maximum age for the beneficiary of an individual RESP
  • For a family RESP, beneficiary must be under age 21 to be added and contributions can be made until they turn 31
  • CESG is only available up to age 17 (and special rules apply for those aged 16 and 17)
  • CLB available to age 15 but can be applied for retroactively
  • QESI available to Quebec residents up to age 17.  Similarly to the Federal Program, special rules apply for those aged 16 and 17)
  • BCTESG a $1,200 one-time grant for BC residents aged 6-9
  • From the date the RESP is opened, you can make contributions for 31 years and the RESP must be closed after 35 years (here are some options for unused RESP money)

Consider:

  • You can’t open a TFSA in the name of a minor (person under 18)
  • With an RESP you need to pay attention to specific age requirements for government grants
  • An individual RESP can be opened for a beneficiary of any age – including yourself

So what should you do?

You have to do what makes sense for your situation.

A financial advisor can help you figure out the best way for you to save for your child’s post-secondary education. Talk to a financial advisor to learn how they can help you and visit AGF.com/RESP.


Every effort has been made to ensure accuracy at the time of publication, however accuracy cannot be guaranteed and AGF takes no responsibility for reliance on the information contained herein. The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2018 AGF Management Limited. All rights reserved.

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