So many choices, limited cash …

The recent doubling of the TFSA limit to $ 10,000 (which means $ 20,000 for a couple) opens up even more choices for Canadians in their attempt to maximize tax-preferred savings. But, given the recent survey released by the Chartered Professional Accountants of Canada this week, which found that only 53 per cent of parents surveyed have a Registered Education Savings Plan for their kids, maybe some Canadians are too enamoured of TFSA s and have neglected to top up their RESPs.

This is unfortunate, because RESP s still remain the best possible way to save for college or university.

In many cases, RESP s behave very similarly to a TFSA . For example, both RESPs and T FSA s are funded with after-tax dollars. Both plans can be invested in a variety of products, such as GICs, mutual funds, stocks and bonds, and both allow the income and growth in the plans to accumulate tax-free. Finally, while TFSA withdrawals are, by their very nature, tax-free, in many cases the RESP also provides what are effectively tax-free withdrawals.

That’s because the RESP contributions come out tax-free and the balance, referred to as Educational Assistance Payments, are taxable to the student, who likely won’t end up paying any tax on EAP s withdrawn owing to the available personal tax credits — e.g. basic personal, tuition, education and textbook amounts — estimated to total over $21,000 annually, assuming tuition of $6,000.

That’s where the similarities end. RESP s come with a kicker: free money in the form of the Canada Education Savings Grant. CES Gs are generally paid at a rate of 20 per cent of annual contributions up to $2,500 for an annual maximum of $500 per child. So, if you’ve got kids under 18 and there’s even a remote chance that they will attend post-secondary education, my advice would be to maximize their CESG before even touching the TFSA .

Let’s take an example of an Alberta family, with two kids, who earn $120,000 split evenly between two working parents. Ignoring specific tax credits for things like public transit and children’s fitness activities, their family tax bill would amount to about $25,000 leaving $95,000 after-tax.

Let’s assume the balance on their five-year fixed rate mortgage at 2.99 per cent is $500,000 and their monthly payments are $2,364. That means they are contributing about $28,000 annually to pay down their debt.

After deducting mortgage payments from their after-tax income, the couple is left with $67,000. If they were to maximize the RESPs to the tune of $2,500 per child, that leaves $62,000 to meet all the family’s expenses, including additional savings.

Clearly, trying to sock away the full $20,000 into TFSA s isn’t realistic. Which is why it’s important, especially early in the calendar year, to set up a budget that includes not only the monthly expenses but also a monthly savings component.