RESP tracking - couch potato investing
As a companion post to my existing thread, this new thread will solely focus on my daughter's RESP. As a change, I'll be openly disclosing the full value of the account.
Statistics show many Canadians do not take advantage of an RESP. Of those who do use an RESP, many Canadians are not aware they can invest for themselves, and instead invest in group plans that are not optimal due to higher fees, restrictions on withdrawals, and under performance.
I'm creating this thread to provide encouragement to those who are looking to take control of their child's RESP, by investing in a passive, index-tracking, low-cost, ETF portfolio.
Feel free to post your questions or your own RESP results below.
The RESP will typically receive new deposits, and be rebalanced on a quarterly schedule (January, April, July, October).
I'll be following the ETF model portfolio, as described on Canadian Couch Potato, with some modifications:
- The ETFs being used in the account are: VCN (Canadian markets), VXC (International markets), and VAB (Canadian bonds)
I've be allocating funds among three asset classes: equity, bonds, and GICs
For the equity portion, I'm allocating 20% to VCN (Canadian), and 80% to VXC (International)
Until the year my daughter turns 4 (2019), I'll be investing 100% of the portfolio in the equity class
Starting in 2019, I'll reduce the equity portion by 1/9 (~11%), and move the funds to bonds: VAB. This process will be complete in 2027.
Starting in the year my daughter turns 12 (2028), I'll be primarily focusing on capital preservation. To do this I'll be reducing the bond allocation by 1/5 (20%), each year and moving it into GICs with a maturity in 2033. I'll be fully out of bonds, and only in GICs, as of 2032.
RESP deposit & government contribution schedule
For RESPs, I have to be mindful of both of the rules surrounding personal and government contributions.
Presently, there is a lifetime contribution maximum of $50,000. I'd like to front-load this as much as possible.
As I intend to hit the maximum, my goal is to deposit $4,000 per year from 2015 to 2023, $3,000 in 2014, $2,500 from 2025 to 2028, and $1,000 in 2029.
Like all Canadians, my family qualifies for the Canadian Education Savings Grant, which provides 20% of the contribution each year, up to a maximum of $500 / year, and a lifetime maximum of $7,200.
As I intend to get the maximum amount, if I follow my schedule outlined above, I'll receive $500 every year from 2015 to 2028, and $200 in 2029.
The portfolio since inception (April 2015): up 5.20% or $467.35
If I count the Canada Education Savings Grant [CESG] funds as an investment gain, the portfolio is: up 18.35% or $1,467.85
The annualized (money-weighted) investment rate of return is 6.48%
The annual cost of the portfolio (i.e, the combined, embedded ETF management fee) is 0.24%, or $22.38
You can log in to view the attachment below.
- April 2015: -1.45%
- May 2015: 2.08%
- June 2015: -1.87%
- July 2015: 4.88%
- August 2015: -5.92%
- September 2015: -2.79%
- October 2015: 5.10%
- November 2015: 1.31%
- December 2015: 0.20%
- January 2016: -3.49%
- February 2016: -3.60%
- March 2016: 2.39%
- April 2016: -1.09%
- May 2016: 3.97%
- June 2016: -1.13%
- July 2016: 4.45%
- August 2016: 0.72%
- September 2016: 0.82%
Last edited by BoringInvestor; 2016-10-03 at 10:23 AM.
The best strategy is just to put in the $2500 each year and any additional in your own or spouses TFSA if you have room. This is particularly true after you have claimed all $7200 in grants.
I don't know where you live but there are some provincial RESP bonuses like this:
I'm assuming you can buy those funds free. If not, E-series is likely better.
Thanks for mentioning the strategy of limiting RESP contributions to only max the grant.
Originally Posted by none
Upon reading your post I've looked into a few calculators and read posts and threads that talk about the difference between RESPs vs. TFSAs.
I've decided to stick with my original contribution schedule for the following reasons:
1. Upon working through the calculations I've found the ending balance differences between i) all RESP vs. ii) mix RESP & TFSA to be negligible
2. I'd prefer to keep all the TFSA room my wife and I accumulate available for our retirement planning
3. I want to keep the account portfolios and balances simple, by not mixing different goals in the same account type
It may not be the 'best' solution from an economic argument, but it's what will work for me, it's one I can stick to, and know I can make work.
That said - if someone does follow this mix RESP/TFSA strategy I'd be interested to know how it's working out for you.
Re: your other comments
- I'm in a province without any additional grants, and my family income is too high to qualify me from receiving any other federal government grants.
- I am with a broker that allows commission-free ETF purchases, so I don't need to use e-Series.
Last edited by BoringInvestor; 2015-06-01 at 04:58 PM.
I can understand that. My plan is to use the RESP/TFSA vehicle as I mentioned in my post.
There are 'strings' on RESP withdraws and once you claim the grant they just add complication in my mind.
One idea is that it's possible to hold more than one TFSA which you could earmark as a hybrid-'RESP' or something and keep additional RESP funds there. To me that seems much easier and clean than potentially paying tax on RESP withdraws when you don't have to. All it takes is your kid getting a good summer job one summer and the tax man comes knocking. Of course, if you don't have the TFSA room then you don't. I guess it depends if this annual 10K keeps going forward or what. Something to keep in mind though.
Also, keep in mind that how you wihdraw funds matters first. See here:
Indeed, I'll have to be mindful when it comes time to withdraw.
Originally Posted by none
For our TFSAs I'd eventually like to be at a point where we can maximize them each year, so I'd rather not get into a situation where I have to juggle room between the hybrid-TFSA, and our retirement TFSAs.
Up to you. I see it as a very simple strategy to manage with a lot of benefits. To each his/her own.
It'll take a lot of money earned at that summer job to undue the value of earning the 20% grant money up front. If you're shoving in money at the last minute, then maybe the TFSA is better, but assuming you are contributing for 10-18 years that "bonus" money will compound.
Originally Posted by none
If your kids are making it into the say 40% tax bracket from their summer job and RESP there are worse problems to have in life.
I think you need to re-read the thread.
The RESP wins every time when you account for the grant; however, once the $7200 is claimed it's better to hold and invest any additional monies in a TFSA.
You start paying taxes around $12,000 and education credits can be carried forward so you may as well save those up when making real money.
Education credits can only be carried forward if you don't have enough income to use them. You can't voluntarily defer them to higher tax paying years.
Originally Posted by none
Some Provinces have added incentives.
Started one for our new born grandson last year. Just applied for the Alberta one time grant of $500. which is available IF you start the RESP at age two years of less.
This grant was apparently going to be eliminated by the budget that the Conservatives proposed prior to their defeat in the recent provincial election.
We like the RESP program for it's ROI but there are three other reasons. First, it encourages us to save for a child's secondary education. Second, the cost of post secondary education seems to be increasing at a much higher rate of inflation. I was astounded at the difference between my university fees and the fees that my children paid 30 years later. Thirdly, I suspect that in the future we will see many more people in post graduate programs simply to land a job. That means an extra year or two of fees and study.
Last edited by fraser; 2015-06-02 at 12:57 PM.