Comparing RESP vs. RRSP
An RESP helps fund your child's post-secondary education—covering tuition, books, and housing — while an RRSP helps you save for retirement. Both offer tax advantages, but choosing the right one can impact your family's future. We'll help you decide how to benefit from both.
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 works in Canada
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 and open an investing account.
Our favourite investing platforms for RESPs
| Justwealth | Qtrade | Questrade |
|---|---|---|
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◦ Best RESP robo-advisor – Offers a dedicated Target Date Portfolio for education savings
◦ Generous government grant automation – Helps maximize CESG and other grants ◦ Low fees, hands-off investing – Ideal for busy parents |
◦ Top RESP for DIY investors – Strong research tools and low fees
◦ High-rated customer service – Great support for RESP-related questions ◦ No account minimums – Easy to start saving with any amount |
◦ Best low-cost RESP brokerage – Buy ETFs for free, reducing costs.
◦ More investment choices – Stocks, ETFs, GICs, and bonds for flexibility. ◦ No annual RESP fees – Keeps more of your savings invested. |
| Justwealth review | Qtrade review | Questrade review |
| Visit Justwealth | Visit Qtrade | Visit Questrade |
Related: Best trading platforms in Canada
Any investments in your RESP will grow tax-deferred until the money is withdrawn from the RESP.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 a year to an 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.
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.
To get the most from your Registered Education Savings Plan (RESP) and the Canada Education Savings Grant (CESG), follow this strategy:
- 1.
Contribute $2,500 per year – This gets you the full 20% CESG match ($500 per year)
- 2.
If you ever fall behind, contribute up to $5,000 per year – The CESG allows catch-up contributions (you can claim one missed year at a time), earning up to $1,000 in grants annually.
- 3.
Max CESG at $7,200 total – Over 14.4 years of $2,500 annual contributions, you’ll hit the CESG limit.
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 or have your money managed through a robo-advisor.
Our favourite investment platforms for RRSPs
| Questrade | Wealthsimple (self-directed) | Justwealth robo advisor |
|---|---|---|
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◦ Low-cost RRSP investing – No annual fees, free ETF purchases
◦ More control over investments – Stocks, ETFs, bonds, GICs ◦ Great for long-term growth – Ideal for DIY investors |
◦ Best for beginner investors – Easy-to-use mobile platform
◦ Commission-free trading – Save on stock and ETF trades ◦ No RRSP account fees – Keep more of your savings invested |
◦ Top robo-advisor for RRSPs – Personalized portfolios, automated investing
◦ Low management fees – Competitive costs vs. traditional advisors ◦ Great for hands-off investors – Set it and forget it approach |
| Go to Questrade | Go to Wealthsimple | Go to Justwealth |
Another option is to open an RRSP savings account with a reputable bank offering high-interest rates, such as EQ Bank or Wealthsimple Cash.
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.
READ MORE: A guide to RRSPs in Canada
A real life example of RESP vs. RRSP | Mike, Mindy and 5-year-old child
Let’s break it down with Mike and Mindy as an example in our RRSP vs. RESP calculator.
Assumptions:
- Age: Mike and Mindy are both are 40 years old
- Child's age: 5 years old
- Income: Each earns between $70,000 and $80,000 annually
- Investment horizon: 15 years (planning to retire at 55)
- Expected annual return on investment: 7% for both RRSP and RESP
- Tax rates: Based on their income, their marginal tax rate is approximately 31.48%.
| Scenario 1: Contributing to an RRSP | Scenario 2: Contributing to an RESP |
|---|---|
| Initial contribution: $2,500 | Initial contribution: $2,500 |
| Tax refund: $2,500 × 31.48% = $787 | CESG Grant: 20% of $2,500 = $500 |
| Total investment: $2,500 (initial) + $787 (refund) = $3,287 | Total investment: $2,500 + $500 = $3,000 |
| Future value after 15 years: $3,287 × (1 + 0.07)¹⁵ ≈ $9,048 | Future value after 15 years: $3,000 × (1 + 0.07)¹⁵ ≈ $8,276. |
| After-tax withdrawal: Assuming a marginal tax rate of 31.48% at retirement, the after-tax amount is $9,048 × (1 - 0.3148) ≈ $6,200. | Tax implications at withdrawal: The original contributions ($2,500) are withdrawn tax-free. The earnings and grants ($5,776) are taxable to the student. Given the student's likely low income during studies, minimal to no tax would be owed. |
While the RRSP provides an immediate tax benefit, the RESP offers the advantage of tax-free withdrawals on contributions and potentially tax-free or minimally taxed withdrawals on earnings and grants, depending on the student's income.
In this scenario, the RESP results in a higher after-tax amount available for education expenses.
Note: Tax rates and rules can change. It's advisable to consult with a financial advisor or tax professional for personalized advice.
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 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.
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 when your child will start post-secondary schooling, 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!
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.
If you don’t feel confident managing your own investment portfolio, use one of the best robo-advisors in Canada 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.
Related read: What are RRSPs, TFSAs, and RESPs anyway?
FAQ
Bridget Casey is the award-winning entrepreneur behind Money After Graduation, a Canadian financial literacy website aimed at 20 and 30-somethings. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She has been featured as a millennial financial expert by Yahoo! Finance, TIME Magazine, Business Insider, CBC and BNN. Bridget was recognized as one of Alberta's Top Young Innovators in 2016.
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