The family-friendly tax changes introduced last week by the federal government have torpedoed your excuses for not saving for your children's post-secondary schooling in a registered education savings plan.
It's a constant source of wonder to this long-time personal finance and investing writer how under-used RESPs are. Remember, this is a program where the federal government offers 20 cents in grant money for every dollar you contribute to a maximum of $500 in grant money per year. Somehow, a majority of post-secondary students report that RESPs from parents or grandparents play no role in the resources they're using to pay for school.
If it's lack of money that prevents you from saving in an RESP, the feds have come to your rescue with an increase in the Universal Child Care Benefit that will start paying out next July. The monthly amount for children up to 6 years old rises to $160 from $100 and a new amount of $60 per month applies to children 6 to 17. These payments are taxable, but never mind. Take the full amount of the increase, or the new $60 amount if you have older kids, and invest it in an RESP.
You could keep your RESP investments in cash and still reap a 20-per-cent return thanks to the Canada Education Savings Grant. But that would be wasting the opportunity you have to put long-term stock market gains to work for your children. A heavy weighting in stocks or equity funds makes sense until five years before your kids graduate from high school.
My vote for the easiest and most cost effective investing tool for your $60 per-child monthly RESP contributions is the Toronto-Dominion Bank's e-series of index mutual funds. They're nearly as cheap to own as exchange-traded fund, cost nothing to buy or sell and offer just enough variety to build a balanced portfolio. Moreover, this series of funds has been designed to accommodate small investors. The minimum initial investment is just $100, where most other funds start at $500, and the minimum acceptable amount for a pre-authorized contribution plan is just $25. Note: The easiest way to buy these funds is to open a self-directed RESP at the online broker TD Direct Investing.
The new Universal Child Care Benefit starts accruing on Jan. 1, but the first cheques won't start rolling out until July. This is a bit of a political stunt, as a federal election could be called next fall. But it's also a chance to jump-start your RESP with your first benefit cheque. You now have no excuse for not using RESPs.