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RESP vs TFSA: Which is Better for Child Savings?

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This article is brought to you by insurance for children, Canada’s leader in financial planning for children and the creator of Child Plan ™ the fastest growing alternative to the RESP. 

As an adult in Canada, you have a variety of options available to you to save for your future.

However, investment options for children are severly limited. While one of the most well known choices parents have used for the past 20 years has been the RESP to save for their child’s future education. Parents have often asked since the introduction of the Tax Free Savings Account (TFSA) what is the difference between an RESP and a TFSA and whether they can open a TFSA account instead of the RESP for their child’s future education? 

Canadian children under the age of 18 are not able to have any types of accounts in their names. Additionally, government programs such as a TFSA are only available for adults over the age of 18.

While parents often ask if they should use the TFSA for their children’s future education there are several limitations and rules that you should be aware of.

While conventional financial advice often relies on a limited number of options, many may be better served by Child Plan ™, a cash dividend, and a life insurance plan that can take care of any financial need a child may need with their savings. 

Many parents do have options when saving for their children’s futures. In this article, we’re going to compare three different savings options. We are going to look at the FSA, the RESP, and a Child Plan ™ participating whole life.

While all three accounts have one common thread which is that any gains achieved within the account are growing tax-free, it is important to know what the rules are and the benefits for each individual plan.

So what are the differences between the RESP, that TFSA, and a Child Plan ™ participating whole life?

Both the TFSA and an RESP are not savings accounts but government programs with government rules. A Child Plan participating whole life is a private investment opened and managed by parents, where there are no government rules or restrictions on when and how your child can access their plan in the future.

To get a clear picture of how your child’s personal savings will be accumulating, simply request a Child Plan illustration to get a personalized plan that matches your kid’s needs.

Tax-Free Savings Account (TFSA)

A tax-free savings account is an account available to all Canadians over the age of 18. Originally started in 2009, contributors are permitted to deposit a certain amount of capital every year that is determined by the Government of Canada. In 2022, the maximum contribution you can make to your TFSA is $6000.

The advantage of a TFSA to every Canadian adult is that all gains within the TFSA’s grow completely tax-sheltered and all withdrawals are completely tax-free.

While all Canadians know of the RESP, with a TFSA you do not get a tax deduction for the amount that you deposit.

With the TFSA there are no restrictions on what you can invest the money in. You can invest in everything from a guaranteed investment certificate at a local bank to stocks and bonds and even mortgages.

We are often asked by parents if they are able to transfer their TFSA say to their children when their child reaches the age of 18. The answer to that is no. When your child reaches the age of 18 they are permitted to open their own TFSA and begin saving for their retirement.

A Tax-Free Savings Account (TFSA) in Canada is a government savings program with two major differences. The first difference is that your TFSA contributions are not taxed (it isn’t taxed because you are using after-tax income), are not tax-deductible from your income like an RRSP, and the second difference is that investment gains within a TFSA are not taxed and all withdrawals are completely tax free.

Registered Education Savings Plan (RESP)

With an RESP, the Government of Canada through what is called the Canada Education Savings Grant or CESG will match 20% of whatever you contribute up to a maximum of $500 annually. If you contribute $2000 the government will match $400, if you contribute $2500 they will match $500 and if you contribute $3000 they will only match $500.

While financial marketers routinely use the phrase lifetime, in reality, parents are allowed to contribute $50,000 to their child’s RESP account by the time they’re 17. After the age of 17, no further deposits are permitted into an RESP account.

How do RESPs Work vs a TFSA – How Does the Money Grow?

It is important to know the difference between an RESP and a TFSA as savings plans for children’s future.

The common thread between both accounts is that all growth within the accounts is completely tax-sheltered. However the main difference between the TFSA and the RESP is that with the TFSA any money you pull out is completely tax-free, while any withdrawals beyond your contributions pulled out of the RESP are taxed in your child’s hands.

You have the freedom with both the RESP and that TFSA to invest in a variety of financial instruments. With the TFSA you can invest in stocks, bonds, mortgages, cryptocurrency, or anything you wish, covered so important to note that the TFSA is for your financial future and your retirement and therefore you have the freedom to take more risk with those investments.

With an RESP you also have the freedom to invest in any financial instrument you wish however it’s important to remember that with the RESP you have a definite date as to when you wish to begin to withdraw, and therefore the greater the risk through the stock market the greater the chance that when you wish to withdraw for your child’s education there may be losses in those investments.

Another difference between the TFSA and the RESP, is that with the TFSA there are no restrictions on what you can withdraw the money for and there are no limits.

With an RESP you can only withdraw funds for educational purposes only and you must provide the financial institution with documentation to support the amount you wish to withdraw. So as an example, you cannot reach into the RESP account and withdraw $20,000 when the tuition is only $10,000.

Best RESP or TFSA Alternative: Child Plan – Participating Whole Life Plan

In this article, we have reviewed the RESP and TFSA, two government savings programs, and how they can be used for your child’s future education and future.

While both programs have benefits for children and for parents they also have complicated rules on deposit limits and withdrawal conditions as well as severe limitations and restrictions.

There is one children’s investment alternative that has been used by Canadian parents for their children’s future for the past 175 years and which can qualify as a child’s TFSA . 

Child Plan ™ participating whole life plan is a private investment for your child’s future and not a government program with government rules and restrictions.

Child Plan ™ participating whole life is the only tax-free investment that parents and grandparents can open for children and grandchildren in Canada.

From the day that you open a Child Plan ™, your child or grandchild will receive a tax-free annual dividend for life and not just the age of 17.

The financial flexibility of Child Plan ™ is impossible to ignore compared to the many rules in place for an RESP and TFSA, including annual contribution limits on both RESP and TFSA accounts.

Child Plan ™ guarantees cash value grows tax-free from the day you open it and can be transferred to your child, tax-free, anytime after they turn 18.

If you are opening an account to pay for your child’s education, Child Plan ™ also doubles as an education fund and continues to grow along with them. Other benefits include:

  • You can open a Child Plan™ “Participating” whole life plan for your child as early as 14 days after birth.
  • No SIN number required. 
  • Cash values can be used by your child for any financial need in their lifetime including education, down payment on a home, starting a business, even to provide financial security for their future family.
  • There are no limits on the withdrawals.  
  • Because Child Plan™ is a Whole Life insurance plan, your child will be permanently covered for life and future generations.
  • Child Plan™ is permanently funded after 20 years. No further deposits will ever be required.

Want to learn more about this powerful savings tool for your child? Request an illustration and receive a personalized Child Plan ™ illustration.

The Bottom Line

There are several options out there for child savings, but none offer the flexibility of Child Plan ™. An RESP will help you save for your child’s education with limits, restrictions, and government rules.

A TFSA has contribution limits even though the money can be withdrawn tax-free at any moment for any use but can’t be opened for your child and can’t be transferred to your child.

Setting up a child for a bright financial future is an important decision, and Child Plan ™ offers the best of both worlds with its combination of savings and insurance.

With no annual fees, guaranteed cash value growth, and tax-free dividends – Child Plan ™ makes it easy to start saving for your child’s future today!

Frequently Asked Questions

What is the RESP vs. TFSA age requirement?

You can’t open a TFSA until your child reaches 18. The RESP can be opened when your child is born but can’t be contributed to after age 17. 

Who can withdraw from an RESP vs. TFSA?

While children can withdraw from the RESP if they attend a government-approved university or education program, only parents can withdraw from their TFSA since children under the age of 18 cannot have a TFSA account of their own.

Withdrawals from a TFSA are tax-free and can be made at any time, but withdrawals from an RESP will result in taxes being owed.

Is there an annual contribution limit for an RESP vs. TFSA?

Yes, there are annual contribution limits for a TFSA (currently $6,000). There is an annual limit on RESP contributions of $5000. However, there is a lifetime limit for RESP contributions of $50,000 per beneficiary by the time they are 17. You can’t contribute any further to an RESP count after the child turns 17.

When does the RESP account have to be closed?

An RESP account must be closed and emptied 35 years after it is first opened. If you open an RESP account for your child when they are two. It must be closed and emptied by the time they reach the age of 37.

Is my investment growth tax-deferred or tax-free for an RESP vs. TFSA?

The investment growth in an RESP is tax-deferred, while the investment growth in a TFSA is tax-free.

Can I transfer my Child Plan to my child after they turn 18?

Yes, you can transfer the Child Plan to your child anytime after they turn 18.

Are there any taxes when I transfer my Child Plan to my child for their education and future?

No, the plan can be transferred completely tax free to both you and your child.

Are there any taxes on withdrawals?

There are 5 ways to access the cash value in Child Plan™ and two of them are tax-free.

Are there any limits on how much we contribute to Child Plan?

There are no limits on the amounts you wish to deposit to your Child Plan for your child’s future.

To learn more about Child Plan ™, please visit insuranceforchildren.ca.

Sample illustration of Child Plan™ Cash and Insurance Values

Based on a Monthly Deposit of $250 per month

Age Accumulated Cash Value Life Insurance Value
20 $82,568 (Education) $612,728
35 $177,953 (House) $1,115,297
45 $303,299 (Security) $1,115,297
65 $834,276 (Retirement) $1,666,824

Sample illustration is based on a monthly contribution of $8.32 a day/$250 a month for twenty years, starting when the child is less than 1 years old. Cash and life insurance values are based on the current dividend interest rate of 6% from a Canadian life insurance company. This example is strictly for illustrative purposes only, the annual dividend scale is not guaranteed and values may differ.

Personalize Your Child Plan™

Request a Child Plan™ Illustration and see how much cash value your child will have for their education and for life.

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*illustrations are reflective of the annual premium amount

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