First of all, it is important to understand that RESPs and RRSPs are both important savings tools. So, you don’t necessarily have to choose between the two. In fact, many people use them in combination. Both RESPs (Registered Education Savings Plans) and RRSPs (Registered Retirement Savings Plans) offer significant benefits and serve very distinct roles.
Which is more advantageous, an RESP or an RRSP? If you’ve ever wondered about your long-term investments, this page is for you. Let’s take a look at what it’s all about.
It is important to remember both the tax benefits and the functions of RESPs and RRSPs. Before we embark on a strategy to determine the best investment for you, let’s first take a look at the definition of each term.
As the name suggests, an RRSP is a savings account for retirement. It offers a number of tax advantages that you can learn about on the website of the Autorité des marchés financiers.
The maximum RRSP contribution is 18% of your previous year’s income, up to a maximum of $30,780 for 2023. If you have not contributed the maximum in previous years, you may add this unused contribution room to your maximum amount.
This option is a savings vehicle for your children’s post-secondary education. The main advantage of an RESP is the generous government grants associated with it: up to a lifetime amount of $12,800 per child.1
The maximum amount you can contribute to obtain maximum grants is $2,500 per year. If you have not contributed in certain years or if you have not reached the maximum possible, you can use your unused grant room from previous years, up to a maximum of $5,000.2 There is no annual contribution limit. However, the lifetime contribution limit is $50,000.
So, you have access to two accumulating benefits that your children can enjoy during their post-secondary education.3 Not only will they be able to benefit from generous government grants4 but also from the income earned on contributions and grants in the form of an Educational Assistance Payment (EAP). A great financial boost to help them with the many expenses associated with school!
It all depends on your income and your priorities. Post-secondary education is a huge investment for families and should not be taken lightly. A good strategy might be to devote a larger portion of your budget to the RESP so that you can give priority to the first financial challenge that you will face – your children’s education – and recover your contributions later, tax-free, to take advantage of your unused RRSP contribution room.
If your priority is retirement savings, but you’re still concerned about your child’s education, we have a solution that offers you the best of both worlds. An RRSP provides tax savings right away, since you can deduct the contributions from your income. It’s a well-known fact that contributing to your RRSP lowers your annual income, which in turn reduces the amount of tax you pay. The goal here is to generate a larger tax refund that you can then reinvest in your child’s RESP to get the government grants. This strategy will allow you to save regularly for both your projects without putting all your eggs in one basket.
To help you determine your RRSP contribution strategy, here are the tax rates by tax backet:5
|$49,020 or less||15%|
|More than $49,020, but not more than $98,040||20.5%|
|More than $98,040, but not more than $151,978||26%|
|More than $151,978, but not more than $216,511||29%|
|More than $216,511||33%|
|$45,105 or less||15%|
|More than $45,105, but not more than $90,200||20%|
|More than $90,200, but not more than $109,755||24%|
What does it mean to maximize a registered education savings plan? This simply means contributing the maximum amount allowed annually in order to receive the most grants possible. Taking advantage of these grants will help you make the most of your investment and ensure maximum EAPs (Educational Assistance Payments) for your child.
When your child begins post-secondary education, you can apply for an EAP to withdraw the grants and accumulated income from your RESP. The principal (your contributions) may remain in the Registered Education Savings Plan and continue to grow or you may transfer it to an RRSP or other plan, depending on the withdrawal strategy you choose.
1. Canada Education Savings Grant (CESG) from 20% to 40%. Quebec Education Savings Incentive (QESI) from 10% to 20%. Based on adjusted family net income. The annual limit is set at $600 for the CESG and at $300 for the QESI. The lifetime limit per beneficiary is set at $7,200 for the CESG and at $3,600 for the QESI. The Canada Learning Bond (CLB) is up to $2,000 per beneficiary and is offered for children born after December 31, 2003, from families who meet the financial criteria. Certain conditions apply; see our prospectus at kaleido.ca.
2. Basic Canada Education Savings Grant (CESG) is 20% and basic Quebec Education Savings Incentive (QESI) is 10%. The annual limit in basic CESG is $500 ($1,000 if unclaimed grants from previous years) and $250 in basic QESI ($500 if unclaimed grants from previous years). Additional CESG from 10% to 20% and additional QESI from 5% to 10%, based on adjusted family net income. The maximum cumulative lifetime amount per beneficiary is $7,200 in CESG and $3,600 in QESI. Certain conditions apply; see our prospectus at kaleido.ca.
3. Some conditions apply. See eligible post-secondary programs in our prospectus at kaleido.ca.
4. Subject to obtaining the necessary approvals to proceed with grant applications. Certain conditions apply. View our prospectus at kaleido.ca
5. These amounts are adjusted for inflation and other factors for each taxation year. Source: “Tax brackets and rates”.