Many Canadians start saving for their child’s education using an unsheltered investment account. Later they may be ready to open a more formal education savings plan like a Registered Education Savings Plan (RESP). Here is a quick review of the advantages and drawbacks of unsheltered accounts.

What are the top three advantages of unsheltered savings?

Like trust accounts and permanent life insurance, saving in an unsheltered account may give you more flexibility than an RESP in three main ways:

1.   You don’t have to worry if plans change. This is important if you are not sure the child will go on to further studies. You can always use money in an unsheltered investment account for other things. There are no costs if you change your mind.

2.   You decide how much and when you’ll save. You can save more than the limit allowed for an RESP or a life insurance policy. You don’t have to follow a set payment schedule.

3.   You can choose any investments you like. Many RESPs offer you a wide range of investment choices, but some do not. With an unsheltered account, the choice is yours.

What are the drawbacks of unsheltered savings?

1.  You're giving up government grants. You can get as much as $500 a year in free money if you have an RESP. Lower income families may get more.

2.  In most cases, you don’t get any tax breaks on your savings. That means you’ll have less money to invest, so your savings may grow more slowly.

Example: Let’s say you plan to save $650 a year for 15 years. If your money grew 5% a year, how much would you make investing in an unsheltered account? What if you made the same investment in an RESP? This chart shows you the difference, before costs and taxes:

 

As the chart shows, dollar for dollar, you will make more saving in an RESP. Even so, there’s still a place for unsheltered investments for some people.

Remember: Unsheltered investments may be right for some people.

If you do choose an RESP, you may want to shop around for a flexible plan. Look for one that allows you to keep the money you contribute, as well as the money you make investing inside the plan.