What advice would you give to parents conflicted about whether they should put their money into an RESP or a tax-free savings account for their child?

Judith Cane responds:

Consumers can save money in both an RESP and a TFSA if they juggle their plans carefully, financial planner John Kason says.Consumers can save money in both an RESP and a TFSA if they juggle their plans carefully, financial planner John Kason says. (Adrian Wyld/Canadian Press)You could put it into a high-yield bank account like PC Financial or ING or Manulife Advantage account — they earn three or 3.5 per cent, depends on what the market is, sometimes it's as low as 2.75. But if you put your money into something like [a RESP], which is relatively safe, the government automatically gives you 20 per cent on whatever you contribute up to $2,500, so it's a guaranteed return on investment of 20 per cent — why would you not put money into an RESP first?

Then if you have more money leftover, if you put your $2,500 in then, I would put it into a TFSA. A TFSA you can do anything with — now the problem with a TFSA is that you have to be 18 so if you're putting money into a TFSA in thoughts of using it for your child's education, then you can't use it for something [else].

Comparisons:

You could put $5,000 a year in — if you have a spouse that's $10,000 a year. When your children get ready to go to school, you could decide what you wanted to do with that money — whether you wanted to supplement their education or buy them a condo or go on a vacation because the kids have moved out — you're not limited like you are with an RESP on where you spend the money.

Sandra Foster responds:

The 20 per cent grant is like a 20 per cent return — where else can you get a 20 per cent return? There's a limit to that and I would recommend that the RESP be put in the name of the parent of the child, because if the child doesn't use up all the money and the parent has RRSP room, any excess money can be transferred in to the RRSP of the subscriber.

John Kason responds:

The tax-free savings account is a $5,000 contribution. I want people to be able to do the most with the same dollar, that's my philosophy. So if I have $5,000 and I have a young family, why not use the $5,000 to make an RRSP contribution, use your tax return to make your RESP.

'Take advantage of time, because once it's in the RESP you can't work backwards, once it's in there you can't take it out until your kid goes to school.' —John Kason, certified financial planner

Alternatively, fund the tax-free savings account now. The deadline for the RESP is Dec. 31 so put off doing the RESP until the end of the year. Perhaps if you've made some wise investments at this time of the year, you're able to take out the money and it's growth and make your RESP contribution.

There's two reasons to do that, one is when you take money out of the TFSA, you're able to put it back into the TFSA and the amount you can put back in is the amount that it's grown to. Take advantage of time, because once it's in the RESP you can't work backwards, once it's in there you can't take it out until your kid goes to school.

A person needs to look at the entire picture: are they making an RRSP as well as an RESP? So follow the bouncing ball. If you make a $5,000 RRSP contribution and you earn a $100,000 a year, you're going to get $2,000 back in taxes. Why not then throw that money into either your tax-free savings account and maybe it grows over the next eight months [at] five or six per cent. Then you can take that money out and throw it into your RESP.

Now that's a lot of work for your advisers, and most advisers don't like that kind of work, but if you're trying to take advantage of every single penny you have — do you see how you're potentially getting all sorts of free money? You've got $2,000 from the government, you put it in your tax-free savings account, maybe it grows by $100, now you take that $2,100 and you throw it into your RESP. And the government gives you 20 per cent free money on your RESP.