Let’s face it, although the cost of post secondary education is heavily subsidized in Canada (and we are fortunate for that), the cost of post secondary education continues to increase. When I went to university, tuition was only about $2500 per year, now it is over $5000 a year. That is only the tuition cost and not including the housing costs and other costs. Inflation will undoubtedly continue to increase the cost of education. Unless your child becomes a Swedish citizen somehow where they pay you a stipend for all you post secondary education (and yes, post secondary is free, and they pay you to study!), education in Canada will cost you. Many parents (including ourselves) want to save up so that their children don’t have to worry about paying for education and being saddled with crippling student debt. That’s where an RESP comes in.
The Registered Education Savings Plan (RESP) is easy to set up and a good way to plan for your child’s post secondary education. Just like a TFSA or an RRSP, it is an investment ‘vehicle’ so you can put whatever you want in it. Even GIC’s at a 1.5% interest rate if you want to be super cautious.
The CESG (Canada Education Savings Grant) provides a 20% grant (yes, that’s free money from the government) to a maximum of $500 a year, for an RESP maximum of $7200. Therefore, over the span of 14.4 years ($7200 divided by $500) provided that the RESP program is not cancelled, baby GYM will receive the maximum CESG of $7200.
Therefore, let’s look at different strategies to fund the RESP that would make the most sense for my family:
RESP strategy A
One common way to invest in an RESP is to just contribute a straight up $2500 from the beginning and keep going until we reach $50,000 in maximum RESP contribution.
However, because the RESP is similar to a TFSA and an RRSP in that it is tax sheltered, meaning anything that accumulates inside the RESP is exempt from taxes, we want to take advantage of that.
Although when the beneficiary (baby GYM who will become young adult GYM) withdraws from the RESP, it will be taxable, but young adult GYM’s income will be very low, therefore the tax hit won’t be bad. It is similar to an RRSP, the RRSP is tax sheltered and when you withdraw it your income should be low (retirement) so that the tax hit won’t be bad.
RESP STRATEGY B
Another strategy is to contribute $50,000 straight up in the RESP. This would allow you to have the $500 for the first year but because the CESG is paid on an annual basis, you wouldn’t be able to get the CESG in subsequent years. Meaning no free money from the government.
RESP STRATEGY C
Finally the last option is to front load the RESP contributions like Strategy B (because we want to take advantage of the tax shelter and compound interest, and all other great things that happen when you have a long investment horizon, like 18 years) but with the CESG in mind. As calculated earlier, to get the maximum CESG grant of $7200 you would need a time horizon of 14.4 years. This would mean contributing:
- $16,500 in the first year which is a nice $500 in CESG given by the government
- $2500 annually from year 2 to 14 (for 13 years) which equals a total of $6500 in CESG
- $1000 in the last year (14th year) which represents the maximum contribution limit of $50,000, so you would only get $200 in CESG grant for that year
A couple weeks after baby GYM was born, we opened up an RESP (we would have done it earlier but we needed baby GYM’s SIN number to set up an account). Yes we managed to make it to the bank in our sleep deprived state. Apparently many parents that the financial advisor had as clients said they brought the baby in at around 2 months. This means many parents are getting a head start with investing for their children’s education, which is great to hear!
Now that we figured out how much we are going to put in, as it was alluded to in the previous paragraph, we opened up a TD brokerage account for baby GYM and will be investing some of the money with TD e-series funds to keep the investing costs low. TD e-series funds track the market with low cost management expense ratios of 0.33% to 0.5%. There are multiple TD e-series options, including US index and the Canadian index. My husband will be the portfolio manager of baby GYM’s RESP as he will be investing in value stocks on top of the TD e-series index funds.
Alternately, we could have used Questrade to buy Exchange Traded Funds at no cost (other than ECN fees). Here’s a link to save $50 (referral) if you’re interested in going that route for your child’s RESP:
Choosing TD e-series is an easy decision for us because of the low MER. Looking at the Ontario Securities Commission MER fee comparison you can see that the opportunity cost for a fund costing 3% in fees is high.
Instead of looking for a needle in a haystack, the next big Google or Tesla, we will just buy the haystack (the market), a great quote by Jack Bogle, the creator of Vanguard ETFs and the author of The Little Book of Common Sense Investing. Jack Bogle has a great quote:
Why look for the haystack when you can buy the haystack– Jack Bogle
We will use a 100% equities option initially as the time horizon is long (we have 18 years after all) and as we approach year 18 we will convert the asset allocation to something that will preserve capital and decrease risk. This approach is similar to investing in an RRSP when one approaches retirement and needs capital preservation. We will be “dialing down” the risk after baby GYM turns 10 years old and slowly switch to fixed income within the RESP year after year until we hit the age of 17 years old.
Using the Ontario Securities Commission RESP calculator, by age 10, the portfolio value of baby GYM’s RESP should be just under $70,000 provided that there is an assumption of 6% annualized returns. Of course it might not look like this depending on when the recession will hit and whether we decide to invest the full $16,500 in year zero or one.
Readers, what do you think of this RESP strategy? What was your RESP strategy like?