Financial hardships can be challenging to address when it comes to educating your child. With post-secondary education becoming expensive in Canada, concerned parents start saving early.
In this regard, you must be aware of popular government schemes in Canada, such as the RESP and TFSA. These instruments significantly help parents and grandparents make the children’s future financially secure. However, parents often find themselves in a dilemma, unable to decide whether to invest in an RESP or TFSA. In this article, we have briefed you about their strategic benefits.
Besides, we have suggested an alternative scheme for investing in your children in this article. The established insurer, Insurance For Children has developed a policy that would perform better than RESP and TFSA.
What is TFSA?
Every Canadian aged above 18 has the provision of opening a savings account called TFSA, free from tax. The contributors can deposit a specific capital each year that the Canadian Government determines. Currently, a Canadian citizen can make a maximum contribution of $6,000 to the TFSA.
The prime benefit of accumulating funds in a TFSA is that the gains are entirely exempted from tax. Moreover, you can make a tax-free withdrawal from the account. One can invest in a wide array of assets like bonds, mortgages, stocks, and local banks.
However, it is impossible to open a TFSA for children below 18 years of age. Therefore, one can start investing only after reaching 18 years of age.
What is RESP?
RESP is a popular instrument using which parents in Canada can obtain the CESG (Canada Education Savings Grant). This helps them significantly in funding the post-secondary educational expenses of their children. The Canadian Government, as a part of the CESG, contributes 20% of the overall contribution of the parents, which does not exceed $500 annually.
Therefore, if a parent contributes $2,000, the Government will chip in with $400. Parents can contribute only $50,000 to the RESP account during a lifetime. Besides, parents cannot make any other deposit into the RESP once the child reaches 17 years of age.
Differences between RESP and TFSA
Both RESP and TFSA have some drawbacks, which you will realize while comparing their relative benefits. Before proposing the most viable alternative to both these schemes, let’s delve deeper into their differences.
1. Age restrictions
It is not possible to open a TFSA for a minor. Canadians need to reach the age of 18 before opening a TFSA, and there is no maximum age limit.
However, there is no age restriction for RESP accounts. If you decide to go for a family RESP, the beneficiary’s age needs to be under 21. You can contribute to these accounts until they are 31 years old. Besides, the Government would provide the CESG only up to 17.
2. Contribution limits
For TFSAs, the maximum annual limit for contribution is $6,000 as of 2021. There’s no restriction on the upper limit for investing annually for RESPs. However, the lifetime contribution cannot exceed $50,000. Exceeding this limit would attract tax implications.
Each subscriber for a beneficiary would have to shell out 1% tax per month on the excess amount. Besides, there is a limit of 7,200 per beneficiary on the CESG limit.
3. Government grants
The account holders do not enjoy any government grant in their TFSAs. However, RESPs have several government grants associated with them. These include the Canada Learning Bond (CLB), Quebec Education Savings Incentive (QESI), British Columbia Training and Education Savings Grant (BCTESG), and Canada Education Savings Grant (CESG).
The TFSA contributions are not tax-deductible. The amount in your TFSA account grows free from tax. The income generated and the contributions are not taxed when you withdraw the amount.
RESP contributions are also not tax-deductible. The income earned within the period and the grants from the Government are not taxed unless you withdraw the funds. The EAP (Educational Assistance Payment) withdrawal is taxable when it reaches the hands of the beneficiary. This includes the grants along with the accumulated income or the earnings.
Neither the Capital Withdrawal nor the Post-Secondary Education (PSE) Withdrawal is subjected to tax since the subscribers had contributed to these funds after being taxed.
TFSA withdrawals are free from tax. For RESPs, the beneficiary can use the EAP to cover expenses while studying. These expenses generally include transportation and rent. As a beneficiary, if you qualify for an EAP, there would be no consequence for the subscriber if the person decides to withdraw the contributions.
If the beneficiary does not enroll in one of the educational institutions when the withdrawal is made, the contributor can make a capital withdrawal request. Thereby, the Government will receive an equivalent amount of the grant.
What makes whole life insurance a better scheme than RESP or TFSA?
Although the RESP or TFSA schemes prove to be popular instruments to save for the future, children need more flexibility in savings plans. After all, it’s prudent to opt for a scheme that brings you the provision to withdraw funds for purposes other than education. As per the government norms, one cannot use the RESP funds for any other purpose.
How about investing in a scheme crafted by the reputed insurer, Insurance for Children, that does away with all these restrictions?
It is a tax-free program that gives you the liberty to access the funds even after your children mature. Moreover, you can use the fund for any purpose that arises. Since you can start contributing to the scheme from an early age, the savings can be significantly more than the child (even at 14 days). Parents need not wait for their child to turn 18, unlike the TFSA.
A whole life insurance policy would holistically cover your child throughout their life. Parents need not adhere to any rigid contribution limit, as in place of both the government schemes. You can transfer these accounts to your child once they turn 18, free of tax. Parents need to fund whole life insurance policies only for 20 years, while their subsequent generations benefit throughout their lives.
Naturally, these schemes prove to be much more flexible and comprehensive than RESPs or TFSAs. This explains why many Canadian parents and grandparents are opting for whole life insurance policies rather than RESPs or TFSAs.
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