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Other Ways to Save for Education

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Registered Education Savings Plans (RESPs) -> Alternative methods of saving

Other Methods of Saving for Your Child's Education Besides RESPs

Pay Down Debt! - One of the best ways to save for your child's education is to pay down debt on which the interest is not tax deductible!  Pay down debt with the highest interest rate first.  Use our loan calculators to see how much interest you can save by paying off your debt more quickly.

Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) - Once your debt is paid off, make sure you have contributed the maximum to your RRSP, and to your spouse's RRSP.  If you are in the lowest tax bracket, choose TFSAs over RRSPs.  When you're in a higher tax bracket, you can always use the TFSA to make a contribution to an RRSP.

Once the RRSPs/TFSAs are at their limit, start saving in a non-registered investment account.  If you save money outside of an RRSP, it is better for tax purposes to have assets which produce capital gains or Canadian dividends instead of interest.  See Try to earn your investment income (outside of RRSPs) at the lowest tax rate possible, on our Personal Income Tax page.  You can use our Canadian Tax Calculator or Investment Income Tax Calculator to compare the taxes you would pay on different types of investment income.

Another option is an informal Trust account for your child, at a financial institution or brokerage.  Any interest and dividends on the account are taxed in the hands of the contributor, but capital gains are taxed in the hands of the child (beneficiary).  Interest and dividends from re-invested earnings are taxed in the hands of the child.  If deposits are made with family allowance or child tax benefit payments received for the child, then all earnings from these deposits are taxed in the hands of the child.  The disadvantage of the trust account is that the funds automatically become the property of the child when the child reaches the age of majority, so the contributor has no control over how the funds are used.  With a non-registered account in your own name, this problem does not occur.

If you are debt-free when your child begins post-secondary education, and have saved some money, you will have much less difficulty funding that education.

We have done extensive financial analysis related to investing in RESPs vs paying down your debt, investing in RRSPs, or investing via a non-registered account.  We did not include any fee calculation with the RESP, and we assumed there would be no taxes payable when the amounts withdrawn are used for education.  Even with this bias toward RESPs, they did not look attractive to us.  The problem with the RESP is that

bullet contributions are not tax-deductible
bulletmany are structured so that the subscriber cannot choose the investments, thus cannot get a very good rate of return (see historical returns on stock market and other investments).  However, many are now structured to hold almost any type of publicly traded investment.
bulletall contributions can be lost to fees if the RESP is discontinued
bulletall earnings may be forfeited if the RESP is discontinued
bulletyou cannot guarantee it will be used for education, and if it is not used for education
bulletthe Canada Education Savings Grant (CESG) is lost
bulletall earnings may have to be forfeited
bulletif conditions are satisfied so that the earnings can be repaid to the subscriber as Accumulated Income Payments (AIP), tax is paid at marginal tax rate plus 20% on the earnings repaid to the subscriber, unless the subscriber can transfer earnings to their RRSP, in which case it will only be taxed at the regular marginal rate when withdrawn.

The only way an RESP has a chance of doing better than paying off your non-tax-deductible debt first, investing in RRSPs, or investing via a non-registered account is if

bullet you could guarantee 100% that the CESG and earnings will be used for education
bullet the RESP can be used to purchase investments with a good rate of return, and
bullet your child can shelter all the Educational Assistance Payments (EAP) by using tax credits for education costs, so that no taxes are payable.

Many institutions now offer the ability to change the beneficiary of an RESP - we have not checked the details of this, so make sure you ask about it if you decide to invest in an RESP.

You cannot guarantee that your child will use the funds for educational purposes, so why take the chance?  Put your money where it can earn a better return (after paying off your non-tax-deductible debt), and then it can be used for any purpose.  However, if an RESP would help force you to save for your child's education when you wouldn't do anything otherwise, perhaps it is the option for you.

Tip:  There are better ways to save for your child's education than RESPs!

Revised: September 20, 2017

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