For many Canadian families, the debate of whether to contribute to an RESP vs. RRSP is a real one. Our expert explains how to decide between the RESP or RRSP, and shares some savvy saving strategies.
For many Canadian families, the debate of whether to contribute to an RESP vs RRSP is a real one. Few have the financial resources to max out both of these accounts, so they must choose one or divide their efforts between both. However, trying to decide whether to contribute to retirement or your child’s post-secondary education is not an easy choice.

How to Decide between the RESP vs RRSP

Choosing between the RESP and the RRSP will depend a lot on your personal circumstances and financial goals for your family. Because these are primarily investment vehicles to minimize income taxes, your household income and marginal tax rate have the greatest implication on which account is best for your money. However, your timeline, lifestyle, and values will also influence your decision.

Nevertheless, both the RRSP and the RESP contribute to your family’s long-term financial security so they should not be considered completely independent, particularly when there are ways to use the powers of one to benefit the other!

How RESP in Canada works

The Registered Education Savings Plan (RESP) is a tax-sheltered and government supported account to help Canadians save for their children’s post-secondary educations. Like the RRSP, this is an investment account where you can hold cash, GICs, mutual funds, stocks, bonds, or ETFs. To really take advantage of the power of the RESP, your best bet is to choose a more aggressive investment option, through an online brokerage account like Questrade.

These investments will grow tax-deferred until the money is withdrawn from the RESP. Because students typically have no or very little taxable income, it is often more favourable for them to claim the withdrawal from the RESP to minimize income taxes paid.

To further encourage you to save, the Government of Canada will match 20% of your contributions to a maximum of $500 per year and a lifetime maximum of $7,200 through the Canada Education Savings Grant (CESG). This is free money that can be invested with the rest of your RESP contributions to grow through interest, dividends, and capital gains until your child makes a withdrawal for their post-secondary education.

For example, if you contribute $2,500 to a Questrade RESP, the CESG will be deposited directly to the account for a total of $3,000. You can then invest that full sum and all the interest, dividends, and capital gains will remain tax-sheltered until the time of withdrawal.

If you’re not a whiz with DIY investing, a robo advisor is a great solution – the entire process is automated and all you have to do is deposit your funds. Wealthsimple and Nestwealth are excellent options for your child’s RESP. Simply open an account and they’ll take care of the rest.

RESPs are a great way to give your child an awesome financial head start. Paying for your child’s post-secondary education with RESPs help reduce or even eliminate the need for them to take out student loans. This will allow them to graduate debt-free and begin saving and investing earlier in their own life to enjoy long-term financial security.

How Does an RRSP work

The Registered Retirement Savings Plan (RRSP) is a tax-sheltered account to help Canadians save for retirement. Despite the word “savings” in its name, this is an investment account where you can hold cash, GICs, mutual funds, stocks, bonds, or ETFs. If you’re a savvy investor, you can DIY with a reputable online brokerage like Questrade (our top pick), or have your money managed through a trustworthy robo advisor like Wealthsimple.

Another option is to open an RRSP savings account with a reputable bank offering high-interest rates.

You do not pay taxes on the income you contribute towards your RRSP at the time you make your contribution. You will pay taxes when you make withdrawals from your RRSP at retirement. This lets the money in your RRSP grow tax-deferred until you make a withdrawal. Because many people will have a lower income in retirement than they do during their working lifetime, the RRSP is a great way to reduce your lifetime income tax burden.

Case Study: Mike and Mindy

Let’s break it down with Mike and Mindy as an example.

Mike and Mindy are 40 years old and have a five-year-old child. They want to help pay for their child’s post-secondary education, so they open an RESP. They also hope to retire or at least reduce their full-time workload at 55 years old, so they also open RRSPs. Mike and Mindy are both professionals and each makes $70,000 to $80,000 a year.

For the sake of our comparison, let’s use a return of 7% for both of the accounts.

Mike and Mindy could contribute $2,500 to an RRSP. Their marginal tax rate is 39.4%, so they receive a tax refund of $984 for their contribution. Mike and Mindy are dependable savers and add the tax refund to their RRSP for a total investment of $3,484. In 15 years at 7% returns, their investment has compounded to $9,612.47.

On the other hand, they could contribute that $2,500 to an RESP. The Government of Canada would match 20% of their contribution as part of the CESG, kicking in $500 and bringing their total investment to $3,000. After 15 years at a 7% return, they have $8,277.09 in the account.

At this point, it looks like the initial advantage of that tax deduction beat the CESG contribution, but we have neglected to measure the tax impact upon withdrawal. Their child will be allowed to earn approximately $22,000 or so before she has to pay any taxes. So if she is not working part-time when attending school and withdraws only from her RESP, the money will be essentially tax-free. Mike and Mindy knew they wanted a fair degree of security in their retirement, so they have a decent income and a marginal tax rate of 27.75%. This means that their after-tax return on their original investment will be $6,945.01 when withdrawn from the RRSP. That’s almost $1,400 less than the RESP.

Any money saved is excellent, but this does illustrate how important tax considerations are in financial planning.

When to Prioritize the RRSP Before the RESP

One of the most important things to realize is that your child will be able to take out student loans for their post-secondary education, but you will not be able to take out loans for your retirement. Remembering this should help you prioritize your own retirement before the college savings for your children. You may also want to consider whether a TFSA or RRSP works better for you.

If you have no retirement savings established for yourself or provided by your employer, it is imperative that you begin saving immediately. Because RRSPs can reduce your income tax burden, they are especially powerful for high-income individuals who have high tax rates. You can begin making RRSP contributions now, then claim your contributions when you file your income taxes to get an income tax refund. At that time, you could use your income tax refund to make a deposit into your child’s RESP, instead of topping up your on RRSP.

When to Prioritize the RESP Before the RRSP

If you already have some retirement savings set aside for yourself and it’s personally important for you to contribute to your child’s post-secondary, it might be right for you to choose the RESP over the RRSP. You may choose to make enough contributions to the RESP to qualify for the maximum CESG match by the Government of Canada. Once you receive the annual and lifetime maximum CESG, you might then choose to focus your efforts on topping up your RRSP.

It’s also very important to note that any RESP contributions to a maximum of $50,000 that your child does not use for their post-secondary education can be transferred to your RRSP completely tax-free. In this context, contributions made to the RESP might actually end up as contributions made to your RRSP! However, it is difficult to know how expensive your child’s post-secondary education will be, particularly if they choose to pursue more than one degree, so gambling that there will be an excess in their RESP leftover for you definitely has some risk.

Timelines, Lifestyles, and More

The other factor that may dictate whether to choose the RESP vs RRSP is your timeline for each. Maybe you’re in a less common situation where your retirement is actually closer than your child’s post-secondary matriculation, in which case you might want to focus on topping up your RRSP before you add funds to their RESP.

On the other hand, maybe you weren’t able to save for the first few years of your child’s life, and now you want to get as much of the CESG as you can before they finish school so you choose to contribute to their RESP instead of your RRSP. More likely than not, you have decades to save for both your retirement and your child’s post-secondary education, and it’s okay to have some years focused on one goal and then other years where you plod away at the other.

Don’t forget there are other ways to help your child as a post-secondary student than only paying their tuition bill. Maybe you cannot afford to contribute a lot of money to an RESP, but you will be able to let your child live at home rent-free while they study. Knowing you can offer this non-financial contribution to their post-secondary education should help you make the decision to focus on the RRSP if that’s what’s best for you.

RRSPs are a powerful tool to secure long-term financial security for yourself. Perhaps you’re less keen to pay for your child’s post-secondary education, but do plan to leave them an inheritance, and an RRSP is likely part of this plan. Ultimately, both the RESP and RRSP are designed to serve your family’s financial security, and contributing to either will benefit you immensely!

Automating your Investment Choice

Whether you’re focusing on the RRSP, the RESP, or contributing to both, make sure you choose to invest in these accounts and automate the process. Where stashing your money in a savings account might only earn you 1% or 2% in interest, you can potentially earn much greater returns by investing in the stock market. Because both RRSP and the RESP typically have very long time horizons, investing is the best way to maximize the powers of these accounts!

If you’re a DIY investor, I recommend using a pre-authorized contribution plan to your discount brokerage account so you invest consistently. Plus, you can get $50 in free trades when you start investing with Questrade.

If you don’t feel confident managing your own investment portfolio, there are a number of excellent robo advisors in Canada, like Wealthsimple (our top choice), that will invest on your behalf. All you need to do is open an RRSP or RESP (or both!) and set up automatic contributions, and they’ll take care of the rest. For the RESP, your CESG disbursements will be automatically deposited to the account and invested on your behalf. A bonus of signing up with Wealthsimple: get your first $10,000 managed for free for a year when you start investing with Wealthsimple.

Lastly, if you’re looking to supercharge your savings, consider opening an RRSP savings or GIC account with a bank offering high-interest rates.

Article comments

16 comments

Hi Guys,

A couple of thoughts here. One is a link to tuition fees check out link from CBC

http://www.cbc.ca/news/interactives/map-tuition-fees/

When you think about RESPs help but fall short and over time the RESPs is gone. RRSPs…has some good things, but the government has and will change rules here and the tax bill will be paid in the future at future tax rates?! My guess is taxes are not going to be much less in the future…like gas prices.

In a nutshell fees are going up higher than inflation and what people can make in the market.

The other big thought is nobody is using a Financial Model. For example, if one has limited amount of money where to put it? How does this impact my life 20, 30 years from now?

If you want, I can scan a model I use. This model includes real estate, RRSPs, wills, insurance, (home, auto, life, disabiltiy, etc.).

A financial model should show inflation, taxes, how a disability or premature death changes everything. Since everyone is different, no two models will be the same.

Cheers,

Brian

Teacher Man says:

Brian, I love the experience and obvious wealth of knowledge you bring to the comment board, but your confusing this situation in order to pump your own financial model is not cool.

I’m not even sure what you’re trying say here. RESPs are gone? What does that mean? You will have to pay taxes on RRSP withdrawals? Yes, you will… How does this affect the comparison? Fees ARE NOT going up higher than what people can make in the market, especially when you consider that with the RESP program you get an automatic 20% ROI from the CESG. You also need to factor in that governments allow more money in these accounts, and wages are also rising with inflation (albeit not at the same rate for the last 25 or so years).

This article is not a personalized financial model, it is a comparison between two savings vehicles for your money, and it is that simple my man.

Hi Teacher Man,

Sorry if you took offence to a financial model.and my offer to add something here. One idea is to see what kind of financial models are out there and have that for a future story.

One needs to look at the long term pros and cons of RESPs and RRSPs etc.
RESPs and RRSPs have advantages and disadvantages. I don’t know if you reviewed the link I added regarding tuition fees let me know.

I understand you are trying to make it simple for your readers but my point is what is the out come 20 to 30 years out? Why not look at that? One may get a different answer.

Also, RESPs and RRSPs even TFSAs is not the only tools for people.

Cheers,

Brian

Teacher Man says:

Hey Brian,

I just don’t want to make things appear more complicated than they truly are for our readers. You have to be careful when stating things like RESPs are not good because of inflation. This is improper logic to provide to our readers. I think this article does a pretty good job of looking at the pros and cons of RESPs and RRSPs. I do mention that RRSPs are dealing with a different investing time horizon and subsequently different conditions apply. I think any financial model can be set up in order to slant results in a certain way. I would much rather people get a fundamental understanding of how certain savings vehicles work and then make their own conclusions as opposed to blindly placing face in a “financial model” that makes several assumptions that may or may not be relevant.

I did take in the link. I’m pretty familiar with rising tuition costs, and I did review the link. I don’t understand how the rising costs of tuition effects the choice of what savings vehicle to use? The costs are going to rise regardless of where you put your money, so it is irrelevant to the conversation.

RESPs, RRSPs, and TFSAs are not the only tools, that is correct. That being said, they are by far the most accessible, and in the vast majority of cases they are the best option at what the purport to do for the majority of Canadians. I think it very worthwhile to compare two of the most popular investment vehicles in a head-to-head comparison in order you help you Canadians.

Thanks again for being such an active participant on Y&T, we really do appreciate it!

Hi Teacher Man,

Lets start again.

Fees are going up faster than inflation. (tuition/rent/food/gas/etc.)
The 7% is not likely to happen as an average for the 18 years. (return).
RESPs are great but your case studies starting at 5 and putting $2500 per year and using reasonable increases of 5% plus per year the child is still short.

Since many readers may not understand insurance and how it works, it can be accessible and more flexible.

If a parent is disabled contributions will not be made to the plan.
Insurance does this.
If money is withdrawn from an insurance policy (the right kind) and paid back the cash value is credited as if no money was ever withdrawn.
Values on the right kind of insurance policies can never go down.
No limit on the cash value insurance policies (or at least very high).

RESPs are great because of the 20% added by the government but have limits on how you can get your money.

In the end having a mix of say RESPs and insurance maybe better, but as I said before one needs a model to see if it makes sense.

Teacher Man says:

Ok Brian, at least we are discussing specifics now, I’ll reply in kind:

1) Fees are going up faster than inflation. This is irrelevant as to the best way to save money.

2) What assumptions do you make to say that 7% is not a probable rate of return? The S&P 500 has returned over 10% since its inception. There is still plenty of growth potential in the world’s markets.

3) If a parent is disabled, the vast majority of them will get an insurance settlement, depending on their employment. This can then be invested on the child’s behalf, or in an RRSP however they see fit.

4) So your withdrawing money from an insurance plan, only to put it back in again at a later date? This is really what you are suggesting as a viable alternative to an RRSP or an RESP? That sounds like an insurance salesman to me, oh, and by coincidence your website is one that sells insurance.

5) I’ve seen and heard this pitch before. The money inside of insurance funds grows at a much slower rate than if you invest it on your own behalf. This is why most financial gurus (including David Chilton most notably) will advise their clients to use term insurance “and invest the rest.” Using insurance for what its meant to be used for – protection against events that are out of your control, makes much more sense than trying to use it as an investment strategy. Basic logic tells you that insurance companies take your money (the premiums you pay) and invest it, and then pay settlements out of the pot. Their profit comes out of your earnings. It has to, or insurance companies would have to run on volunteer labour!

6) You comment that withdrawing from an RESP has strings attached? It’s pretty straightforward, and there is a great feature that allows you roll the money into your RRSP if none of your children use the money (although they almost assuredly will in this increasingly information-based economy). Your proposing that taking money in and out of an insurance plan doesn’t have strings attached? Come on man…

7) I want one specific situation where any amount of money in an insurance plan would be better from an investment standpoint than in an RESP. The fact is that it does not exist. Please come bearing hard facts and quit trying to merely sell insurance, or I will forced to disallow comments from here on out Brian.

Teacher Man,

I will address two points

# 2 The “10% ” returns rates vary for different times one if you look at Jan 1 1999 to Dec 31 2011 the S& P returns were 3.85% as one example. check out http://www.moneychimp.com/features/market_cagr.htm

#7 If use an example of a 20 pay insurance policy for a five year old male at $2500/year the cash value is $67,880 at age 25 and death benefit of $435,948
At age 55 the death benefit is $1,331,919 and the cash value is $592,031 This keeps going in value over one’s life time.

The insurance idea is not to say RESP are bad (the 20% is great) but later in life the money is spent. The “strings” is in order to keep the policy alive one can borrow up to 90% of the cash value. Also one would want to repay the amount borrowed over time. Lets face in a $1,000,000 plus policy will cost a lot at age 55.

I can comment on the other points but I will see if you are open minded here on other ideas. I sent an e-mail to you on a book you may want to read, let me know if you got it.

Brian

Teacher Man says:

Brian,

2) Of course an “average” of 10% varies Brian… We could both cherry pick times when the market did well or didn’t do well, but the bottom line is that the long-term average is over 10%.

7) The death benefit of insurance is irrelevant to its use as a savings vehicle. Besides, why do I want a million dollar insurance policy when I’m 55? About the only time I ever want that much insurance is if I have just moved into a large house and have three young children. To use your own numbers, if a 20-year old took those insurance premiums and put them in a TFSA (the RRSP comparison isn’t even valid because it is pre-tax dollars which is another huge advantage), invested in the market average (I’ll use returns of 9% just to be conservative) he would have $638,846.73 by age 55. That money could now be taken out whenever they wanted, as opposed to borrowing and returning and the tax ramifications of that!

I like to think I’m pretty open minded, but your facts just aren’t going to line up in the case Brian. It’s impossible given the basic business model of an insurance company. The insurance companies invest in the same markets I do, then they take their cut before anything else; consequently, we’re all better off skipping the middleman.

Term insurance for whatever you need, and invest the rest!

Randy says:

Excellent article Teacher Man. It is worded well and gives great examples that make the understanding very simple. I also completely agree with your points in the discussion between you and Brian.

The best thing I learned from my father is to take advice from those who have attained the goals you wish to achieve. Many have preached to me about these insurance models and many other wonderful schemes, none of them seem to be at the same point in life as me though… funny how that works. (unless they are the middleman or are working for the middleman himself).

Goose says:

Hi Teacher Man,

Excellent post! I have 2 kids and I live in Quebec where there is an extra 10% given by the government for RESP contributions.

My plan is to contribute 7500$ per year in my RRSP and use the tax credit of 2500$ and invest it in the RESP to get the 30% grants. I would do that for 14+ years to earn the maximum grants as possible. After that, invest the tax return in the RRSP or TSFA, depending of which one has some room available!

I have two kids and to not loose the potential 30% free money from the grants, I will wait until the second one is 10 years old to see if my boys have a certain potential and interest in school. If yes, I will invest 5000$ per year to catch up the grants until the maximum is reached.

By doing that, I make sure that I will have a fairly huge amount in my RRSP and in my RESP, without having to stress about the fact that I need to find a way to withdraw 100k from the RESP during 2 or 3 years.

The fear of having too much money in a RESP is not a big problem but if I can max out my RRSP without having to think that I should keep some room because of the possibility of rolling the interests from the RESP to the RRSP, it would be the best case scenario for me.

Oh! I forgot! I will probably by an insurance plan to………….. I think I will stop here, just by writing that made me realize that it was an awful plan. Low cost investing is the way to go!

Goose

Rek says:

Lets say I know i will be able to pay my child’s tuition out of pocket when they go by using my usual annual savings contribution (i won’t save those 4 years). I don;t want to turn down free money so i will still buy RRSP or RESPs. But what one is better in that scenario?
My logic is that i am better to get only RRSPs and keep that interest compounding and not save for 4 years rather than get RESPs.

Basically i am saying if i can afford to pay for school for my children with my annual salary is it better to buy RRSPs or RESPs?

Kyle says:

Honestly, what I would likely do Rek (not knowing anything else about your situation) is go RESP. That automatic 20% top up the government gives is so valuable. Then, in a few years, when you would have been paying out of pocket for your child’s education, use that money for an RRSP contribution. You’ll lose a few years of compounding, but that automatic 20% is tough to beat.

Rek says:

thanks Kyle. the thing is with the RRSP tax refund I get more than the 20% a RESP would give.

Kyle says:

Sure, but the tax refund is just delaying the tax you pay (you’ll still have to pay when you take it out), the 20% RESP is basically free and clear (your child likely won’t pay tax on it as a student).

Here is my case study, if it helps others as I am actively withdrawing and I don’t have enough for 2 kids in university at the same time.

1st – We pay for their education. That’s a rule we have that was passed down from my family. Ensure a post-secondary education with no debt. (Excluding graduate school)
2nd – I pay for everywhere in Canada and depending on the field of study, that’s $25K per year (2 terms).

Over the span of 18-20 years, the income for the family will change. Depending on when you have your kids. In our case, we were young (26) and it was hard to do both RESP and RRSP for a while. I dropped RESP for about 3 years and only did RRSP and TFSA. Why drop it? We won’t sacrifice our RRSP and retirement to fund an RESP, we can always withdraw from our TFSA if needed to help pay.

The biggest tip I can share is that you need to let your kids know how you intend to help or not help them. Some kids find out when they graduate that they won’t have help. That means you need to know where you help and where you won’t help (i.e. draw the line) and let them know.

Do the minimum to get the free government grant and then decide how you want to do the rest through a TFSA or another method.