If you really want to squeeze the maximum juice from a registered education savings plan, start just after a child is born.
Starting young helps ensure the RESP draws the maximum amount of grant money available to encourage contributions. The government adds 20 cents to every dollar you contribute, up to $500 in grant money yearly and $7,200 lifetime (contributing $2,500 a year gets you the maximum grant). Starting young also helps you benefit from long-term compounding, and it enables you to invest aggressively because the money won’t be needed for well more than a decade.
This brings us to a recent reader question: “What would be a good way to invest $5,000 today to start an RESP for a toddler?”
Toddlers are considered to be 12 months to 36 months old, which means the beneficiary of this reader’s RESP has at least 15 years until high-school graduation. That’s enough time to use what I think is an ideal investment – both simple and cheap – for parents and grandparents setting up RESPs.
Balanced ETFs are a diversified portfolio in a single package and available from firms that include BlackRock Inc., through its iShares lineup; Bank of Montreal (BMO ETFs); Horizons ETFs Management (Canada) Inc. and Vanguard Investments Canada Inc. There are versions for conservative, balanced and aggressive investors. In this case, let’s go with aggressive.
The growth version of the balanced ETF typically has an 80-20 split between stocks and bonds, which is aggressive but not foolishly so. Expect a fee of about 0.25 of a percentage point, and be prepared for brokerage commissions of no more than $10 to buy and sell. Typically included in these funds is exposure to Canadian, U.S. and international stocks in both developed and emerging markets.
A perk with balanced funds for RESPs (and retirement, for that matter) is that you can lower the risk level as you get close to the date when the money in the plan will be needed. For example, you could switch from a growth-oriented balanced ETF to plain-vanilla balanced (60-40 stocks/bonds) or conservative balanced (40/60) ETFs when the beneficiary is within five years of graduation.
A year or two before graduation, consider putting all or most of the plan’s contents into a mix of cash and guaranteed investment certificates. This will protect against a market crash just ahead of graduation.
The choice of investment for an RESP is important, but not the top priority. First, start young. Second, contribute as close to $2,500 a year as you can to capture that federal grant money. Next, worry about a good way to invest.
Rob Carrick