A registered education savings plan (RESP) is an attractive way to build a nest egg to finance a child’s post-secondary education. But while low interest rates and high stock-market valuations could make investing more challenging in this tax-deferred savings vehicle, there are different strategies that could improve potential returns.
“The RESP is a great vehicle for educational savings,” says Matthew Ardrey, vice-president and portfolio manager at TriDelta Financial Partners Inc. in Toronto.
He points to the federal Canada Education Savings Grant (CESG), which allows a beneficiary to earn 20 per cent on the first $2,500 contributed annually, or $500. While the grant has a maximum of $7,200, the maximum RESP contribution limit is $50,000. To get the CESG this year, contributions must be made by Dec. 31. Any unused grant entitlement can be carried forward, but only to a maximum of $1,000 a year.
“You can’t knock a 20-per-cent government grant. It may not be free money because it’s taxable in the students’ hands, but they typically have low income and education credits to offset any [RESP assets] that might be taxable,” Mr. Ardrey says.
Although many post-secondary students are taking courses online and living at home this autumn because of the COVID-19 pandemic, it typically costs about $20,000 a year for undergraduate tuition, lodging and other expenses to attend a Canadian university, he says.
A family RESP, which allows for multiple beneficiaries, is a more flexible option than opening an individual RESP, Mr. Ardrey adds. For example, if one of two children do not pursue post-secondary education, the grant for that child must be repaid to the government, but the rest of the savings can go to the other child for schooling.
However, with a family RESP, there’s a balancing act in managing the assets because of the different years when the funds are needed, he says. “If you have three kids, aged 12, nine and four, you still have to make sure you have enough growth for the four year old and also start thinking of the volatility risk for the 12 year old.”
When opening an RESP at a client’s child’s birth, he typically allocates 90 per cent to stocks through an equity pooled fund managed at his firm and 10 per cent in bonds through BMO Aggregate Bond ETF (ZAG-T).
“The fixed income is for volatility insulation,” he says. “I don’t think we’re going to see much in the way of returns in fixed income.”
Once the RESP has about $20,000 in assets, he might use a mix of 60 per cent in equities, 30 per cent in alternative investments and 10 per cent in bonds.
Earlier this year, TriDelta began managing an alternative investment fund that focuses on eight strategies ranging from private debt to private real estate. Target returns from alternative investment income is 7 to 9 per cent, Mr. Ardrey says.
Justin Bender, a portfolio manager with PWL Capital Inc. in Toronto, also expects it will be tougher to generate robust returns over the next 10 to 15 years.
Recent calculations indicate that a balanced ETF portfolio of 60-per-cent stocks and 40-per-cent bonds could return about 3.6 per cent annually in the future after product fees and foreign withholding taxes, he estimates.
The key to an RESP is to make sure to apply for the CESG because that’s at least getting a 20-per-cent guaranteed return on a $2,500 investment, “whereas future investment returns are not guaranteed,” Mr. Bender says.
Focusing on fees is also important because they can eat away at returns, he says. Exchange-traded funds (ETFs) offered by Vanguard Investments Canada Inc. and Blackrock Asset Management Canada Ltd. can offer exposure to a one-stop shop, global portfolio of stocks and bonds that only cost about 0.2- to 0.25-per-cent annually, he says.
Asset-allocation portfolios reduce the need to pay more fees for several ETFs, he says. Some of the big banks’ discount brokerages charge about $10 per ETF transaction and will waive maintenance fees if clients start a pre-authorized monthly contribution plan in their accounts.
When opening an RESP at a child’s birth, he says there’s not a big advantage to an all-equities portfolio given that the value in the early years will be modest.
A sample strategy, he says, could include holding Vanguard Growth ETF Portfolio (VGRO-T), with its 80/20 stock-bond mix from birth to age four; Vanguard Balanced ETF Portfolio (VBAL-T) with its 60/40 stock-bond mix for ages four to nine; Vanguard Conservative ETF Portfolio (VCNS-T) with its 40/60 stock-bond mix for ages nine to 15; and Vanguard Conservative Income ETF Portfolio (VCIP-T) with its 20/80 stock-bond mix for ages 15 to 18.
At age 18, the money could go 100 per cent into cash to be held in a savings account at a bank or in guaranteed investment certificates (GICs) if the client is certain when the money is needed, Mr. Bender adds.
Steve Bridge, an advice-only financial planner with Money Coaches Canada Inc. in North Vancouver, echoes the need to keep fees low to enhance returns over the long term. He favours opening an RESP with a robo-advisor that offers low-fee ETF portfolios or investing in low-fee index mutual funds with a bank.
Robo-advisors, which charge annual fees in the 0.4- to 0.6-per-cent range, can offer a wide range of index ETFs and provide automatic rebalancing, he says.
Toronto-based robo-advisor JustWealth Financial Inc. offers RESP target-date portfolios, which become more conservative the closer to the time when the beneficiaries need the money, Mr. Bridge says.
Bank index mutual funds can also be attractive because they charge low fees below 1 per cent, he notes. Toronto-Dominion Bank’s e-series index funds are even cheaper if purchased through the bank’s online brokerage.
Once the student is close to needing the money for post-secondary education, it can be transferred to a high-interest savings account, Mr. Bridge says. The Canadian High Interest Savings Bank Accounts website lists alternative banks and their interest rates.
He often gravitates to EQ Bank, a unit of Equitable Group Inc., partly because it’s less likely to vary its rate. This bank currently offers a 1.7-per-cent interest rate with no minimum balance.
Besides the CESG, some provinces offer additional grants. Families in British Columbia can access the British Columbia Training and Education Savings Grant, which provides $1,200 to children between their sixth and ninth birthdays.
“It’s a one-shot deal,” Mr. Bridge says. “Some clients who have come to me to open up an RESP are pleasantly surprised.”