How TFSA can pick up where RESP leave off.
Posted By FP on January 13, 2010
With RESP you can help YOUR Child Become a Million Dollar Richer
It’s that season of the year again when most of us want to make the most of our money by investing it in the right vehicle, helping us reach our dreams. As parents we want to do our best to help our kids start their life on a good ground. Since the TFSA was introduced to Canadians, parents have even more options when it comes investing into your kids future.
Hope this article will help you consider some options on how you as a parent can help your kids become a million dollar richer.
The Tax Free Savings Account, or TFSA, is an enormously versatile saving, investment and cash-flow management tool what become available at the beginning of January 2009.
Most often the TFSA is used to balance a retirement portfolio, as it helps to minimize the taxes at the retirement. But besides supplementing tax-sheltered money in RRSPs and RRIFs, the TFSA can pick up where registered education savings plans (RESPs) leave off.
Often parents cease contributing to a child’s RESP after age 17, the last year RESPs generate the 20% Canada Education Savings Grant (CESG). Coincidentally, the age at which teens can open their own TFSA is 18.
RESP contributions can still be made after the grant is no longer available, but most parents stop the contribution once the grant cease. There are some intriguing things that can be done with the RESP and TFSA, particularly if there is not enough money to maximize both.
For example, if you only have $5,000 to save per child, you might put the first $2,500 into an RESP to maximize the grant and put the other $2,500 in the TFSA, maximizing flexibility. While RESP can be used for a child post secondary education only with the TFSA, you can do what you want, so it’s comforting to know it’s there. You may well intend to use it for the child’s education, but if something else comes up you don’t have to.
Parents must balance the plus of the RESP grant against the reduced flexibility of the RESP, but if you discount the grant, I’d say the TFSA is superior.
If an RESP is only big enough to fund four years of university, additional contributions to a student’s TFSA could fund post-graduate work. RESPs require investments be dedicated to post-secondary education. If the student opted to curtail higher education after only a year or two as an undergraduate, money saved in a more flexible TFSA would be available with no strings attached, whether used for an extended vacation, to start a business or to buy a home or a new car.
Before TFSAs, it often made sense to continue to contribute to RESPs past 18, just for its ability to shelter interest income from tax. By age 18, RESPs should no longer be in equities because you don’t want to encounter stock market risk within five years of needing the money.
TFSAs may also replace another education savings option for parents –in-trust-for (ITF) mutual accounts. Equity mutual funds held in trust for children are usually tax-free since any capital gains accrue in the child’s name. But ITF accounts attribute any interest income back to the parent. Since education savings plans should be mostly in interest-bearing investments once post-secondary education looms, ITF accounts have become less appealing. True, ITF accounts don’t have to be dedicated to education, and in that respect they are more flexible than RESPs. But TFSAs are more flexible than both RESPs and ITF accounts.
TFSAs can also be used by adults who plan to go back to school. Currently, under the RRSP Lifelong Learning Plan, RRSP holders can withdraw up to $20,000 spread over four years (no more than $10,000 withdrawn in any one year). But the rules force them to repay the RRSP. Meantime, the RRSP loses the growth intended to boost retirement.
I think if I had the choice of saving for my education, I’d do that in a TFSA and leave the RRSP for retirement savings.
While RESP income, growth and grants are technically taxable in a child’s name, most students will pay minimal tax because of the basic $9,500 personal exemption, plus tuition, textbook and other credits. For most students, the first $18,000 of income should generate little or no tax. If the student needs more than that amount and his or her RESP have been maxed out and the parents have maxed out their own TFSAs, they could gift the child’s TFSA once they are 18.
Parents should first max out the CESG to the $7,200 per child limit. That’s assuming the child will hang in for three or four years in post-secondary school. Under the less common scenario of a student having to pay high amounts of tax after receiving an inheritance or other income on top of an RESP, the TFSA is a superior way to go.
As a conclusion I would say that in most cases, it is better to go with the RESP because of the grant, which is basically free money from government, but take advantage of the TFSA’s flexibility too. They both can help have a well balanced financial portfolio for your child, this putting them on a better start in life.
Contact me for a FREE evaluation on RESP and TFSA investment choices that could help YOUR child become a million dollar richer!
The holiday shopping season has been in full swing for several weeks, and everywhere, consumers are struggling with how to avoid impulse buys and avoid adding to their debt load. Every year you hear over and over again the how to: stay on a budget, keep a list, check the list again, and sleep on it and the advice goes on.