Which investment is more advantageous,
an RESP or an RRSP?
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.
A tax-efficient investment
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.
RRSP—Registered Retirement Savings Plan
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.
This plan reduces your taxable income for the year in which the investment is made and can also be used to purchase a first property thanks to the HBP (First-Time Home Buyers’ Plan).
RESP—Registered Education Savings Plan
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
So, you have access to two accumulating benefits that your children can enjoy during their post-secondary education. Not only will they be able to benefit from generous government grants 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!
Which investment should be my priority, an RRSP or an RESP?
It all depends on your income and your priorities. In general, it is recommended that you maximize the RESP for each child before investing in an RRSP. However, you must consider your annual income, as the tax rate varies by income bracket. For example, if there is a difference of $1,000 before you revise your tax bracket downward, you could invest that amount in your RRSP to “lower” your income and thus change the bracket and reduce your tax rate. Then you can focus on maximizing your RESP!
Here are the tax rates by tax backet:2
|
Federal |
|
| $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% |
|
Provincial |
|
| $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% |
| Over $109,755 | 25.75% |
Why should I maximize my RESP?
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 or you may transfer it to an RRSP or other plan, depending on the withdrawal strategy you choose.
Contact us for more information on RESPs and their benefits!
1. Canada Education Savings Grant (CESG) of 20–40%. Based on adjusted family income. The maximum annual CESG payment is $600, and the maximum lifetime payment per beneficiary is $7,200. The Quebec Education Savings Incentive (QESI) is 10–20%. Based on adjusted family net income. The maximum annual QESI payment is $300 and the maximum lifetime payment per beneficiary is $3,600.
2. These amounts are adjusted for inflation and other factors for each taxation year. Source: “Tax brackets and rates”.