We set up an RESP for our daughter just a few weeks after she was born. Being new parents with little free time, we just opened the most straightforward RESP account that was available – an RESP GIC Account under a family plan.
This account was easy to open and set-up our monthly contributions. The RESP GIC Account offered an interest rate of 1.95% and it was eligible to receive all of the government grants.
We wanted to get an RESP started right away, even though we could only afford small monthly contributions at the time. Here’s why:
- Tax-free growth – Your child is 18 years (or more) away from attending post-secondary school. Even small contributions can add up quickly over time. Contributing $50 a month for 18 years with an annual return of 4% will add up to over $15,000.
- Canadian Education Savings Grant (CESG) – The government kicks-in $1 for every $5 that you contribute to your RESP (up to $500 per year) through a program called the Canadian Education Savings Grant. That’s a guaranteed 20% return! When you include the CESG with the example listed above, the total adds up to over $18,000.
- Alberta Centennial Education Savings (ACES) – The Alberta government provides a one-time $500 grant when you open up an RESP, with no contribution required. They also provide three subsequent payments of $100 when your child reaches the ages of 8, 11, and 14. When you include the ACES grants with the example above, the total adds up to nearly $20,000.
It’s important to open up an RESP and get started early with whatever contributions you can afford. However, I believe you should have your finances under control and start saving for your own retirement before worrying about maxing out your RESP contributions.
We put $50 a month into an RESP for about two years before recently bumping that up to $100 a month.
At the beginning of this year, I wanted to switch from the RESP GIC Account to the TD e-series funds. TD e-series is widely known for low cost index funds, which are a great fit for a self-directed RESP account.
Unfortunately, transferring the funds from my existing RESP GIC Account to the self-directed TD e-series account would mean losing any grant money that I had received up to this point.
So I had to open a new RESP account through TD Waterhouse and direct my monthly contributions to this account. With each monthly contribution, I put $100 into one of these four funds:
|Canadian Equity||TD Canadian Index – e (TDB900)||25%||MER – 0.33%|
|US Equity||TD US Index – e (TDB902)||25%||MER – 0.35%|
|International Equity||TD International Index – e (TDB911)||25%||MER – 0.50%|
|Canadian Bonds||TD Canadian Bond Index – e (TDB909)||25%||MER – 0.51%|
The CESG ($20/month) is automatically deposited into the cash portion of this account. I will rebalance this portfolio when it strays from the original asset allocation – probably once a year. I’ll change to a more conservative asset mix once we get closer to the withdrawal stage.
Contrary to popular belief, the TD e-series funds were not difficult to set-up and purchase. Of course, it probably helps that I already deal with TD Bank and use TD Waterhouse for my RRSP and TFSA accounts.
If I could do it all over again I would set up our RESP with TD e-series right from the start. It’s an extra few steps, but it’s worth the effort. Instead, I have $2,500 sitting in a separate RESP GIC Account that I have to keep tabs on every few years to roll into a new GIC.
If you’re looking for more information on how RESP accounts work and how to get one started, check out The RESP Book by Mike Holman. This book is very useful for parents, no matter what stage they are at with RESPs.