RESP vs. RRSP and TFSA: What’s the best option for education savings?

I know you’ve heard of an RESP before. The registered education savings plan (RESP) has been around for nearly 50 years, helping Canadian parents, grandparents and guardians save up for a child’s post-secondary education. Since the RESP’s 1974 launch, however, the government has created other accounts designed to help Canadians grow their savings, like the tax-free savings account (TFSA), and many banks have launched a high-interest savings account (HISA). With all of these options, you might be wondering if an RESP is still the best way to save for your child’s education.

It’s a great question that I often hear from parents, who are understandably worried about the growing costs of higher education. The price tag for tuition is steep—and getting steeper. For the 2022–23 school year, the average undergraduate tuition fee in Canada was $6,834. That’s 2.6% higher than the year before, and it doesn’t include expenses like textbooks, accommodations, meals and transportation. With the cost of living continuing to rise across Canada, families are rightfully concerned about the best ways to save and make every dollar count—especially when it comes to putting money aside for their child’s education. So, let’s take a look at what would work best for you.

As with any type of investing, it’s good to start ASAP. Families can set themselves up for success by starting to save while their kids are young—still in diapers, even. And, if you have an older kid and you’re just starting an RESP now, keep reading. This is relevant to you, too.

Option 1: Registered education savings plan (RESP)

I’ll cover this first because that’s what we offer at Embark. An RESP is the only account designed specifically to help families save for post-secondary education. It’s a type of registered account, meaning that it’s registered with the federal government, and the money and investments held inside it grow tax-sheltered. Over time, that can make a big difference to your savings. The best part is, when you withdraw your funds from the account, they’re taxed in the hands of your beneficiary, often resulting in little-to-no taxes being applied to your savings if done strategically.

Another huge RESP benefit: It’s the only account where you can get government grants—free money for your child’s education—if you properly plan your contributions.

The big one is the Canada Education Savings Grant (CESG). The government will match 20% (up to $500 in a given year) on your first $36,000 of RESP contributions; for each child, the maximum CESG is $7,200. Low-income families are eligible for an additional $2,000 in the form of the Canada Learning Bond (CLB), and parents residing in British Columbia and Quebec have access to additional grants, too. (To see how your savings can grow in an RESP, try our education savings calculator.)

With an RESP, every child has a maximum contribution limit of $50,000. Over the plan’s 35-year lifetime, it can grow far beyond that mark through government grants and investment income. If you have more than one child, you can also open a family RESP and combine and divide the funds as needed between them. If your children don’t end up going to school, you can transfer your RESP assets into your RRSP (except for the grants, which will go back to the government), if you have contribution room.

Option 2: Registered retirement savings plan (RRSP)

The RRSP is another type of registered account, created to encourage Canadians to save for retirement. Your RRSP contributions are deducted from your taxable income, and your savings and investments can grow tax-sheltered inside the account, until you withdraw them. For most Canadians, that happens in retirement, when they’re in a lower tax bracket.

The government offers a program, the Lifelong Learning Plan (LLP), that allows account holders to borrow up to $20,000 from their RRSP to cover education costs and then repay it over the next 15 years. However, you can only use the LLP to pay for your own education or that of your spouse or common-law partner. So, using RRSP funds for a child’s education means you’ll have to pay income tax on the withdrawals at your current marginal tax rate—which is the opposite of what you want to have happen with a registered account—as well as suffer a setback to your retirement savings.

Option 3: Tax-free savings account (TFSA)

A TFSA is another type of registered account. You won’t get a tax deduction for contributing to a TFSA, but the account is very flexible, allowing you to grow your savings tax-sheltered and withdraw money tax-free. It’s a great option for short-term savings goals, like a big purchase, a wedding or, yes, a child’s education. However, the TFSA has a contribution limit each year (for 2023, it’s $6,500), and you won’t get any government RESP grants. That’s money you’ll miss out on if you go for a TFSA over an RESP.

Option 4: Regular savings account

What about your regular savings account at a bank? Unfortunately, this type of account pays very little interest—certainly not enough to keep pace with inflation. Saving up a large amount of money in a regular account means risking that the value of your money will depreciate by the time your child heads off to school. You’ll also miss out on the growth potential of tax-sheltered investments you could have purchased with the money sitting idle in your account, not to mention government RESP grants and their growth potential. They should teach this stuff in school, right?

Option 5: High-interest savings account (HISA)

HISAs have been around for a couple of decades, but they’ve grown in popularity in recent years—in part because of the Bank of Canada’s interest rate hikes in 2022 and 2023. Now it’s possible to find HISAs that pay 2.5% or 3% interest, plus short-term promotional rates as high as 5.25%. HISAs are safe and stable, but like other kinds of savings accounts, they don’t hold investments, and you could miss out on the growth potential of investments like mutual funds and exchange-traded funds (ETFs). Plus, there’s no real growth on your money when you account for inflation. Also, no RESP grants with this route, either.

The power of RESP government contributions

All things considered, the RESP remains a stand-out tool for education savings, on the strength of the tax-free government grants you can receive—particularly the Canada Education Savings Grant. To get the full $7,200, planning is key.

At Embark, a Canadian fintech focused on education savings and planning, we help families maximize their savings and get the most out of government RESP grants. We also manage RESP investments, using a “glidepath” approach tailored to your child’s age—the closer they get to college or university, the more conservative the portfolio. Visit embark.ca for more details about what we do.

Read more about RESPs:

• How much money does the government contribute to an RESP?
• What is the RRSP contribution deadline?
• Reducing risk in an RESP: How to invest as your kid approaches college or university
• Is an RESP worth it? Yes, even if only for the government grants
• You opened an RESP—now what?

About Andrew Lo

Andrew Lo is the CEO of Embark, Canada’s education savings and planning company. As a fintech leader for over 30 years, he’s focused on making the best financial services available to Canadians.

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