Parents, here’s a task to add to your back to school to-do list: Check the registered education savings plan you set up for your children’s college or university costs to see whether you have the right mix of investments.
As the father of two twentysomething university grads, I’m an RESP veteran. One of the lessons I learned is that running an RESP portfolio is like managing a registered retirement savings plan, but sped up. You might have a span of 30 to 40 years over which you have to adjust the mix of investments in an RRSP. You have roughly half that much time with an RESP, if we assume a child starts a postsecondary education at age 18.
What investments to use? I had a mix of ETFs and GICs for the most part. A query from a reader with a six-year-old daughter reminded me how there’s an even simpler solution available today. “I wonder what stocks, mutual funds, guaranteed investment certificates or a basket of these to buy and hold for the next 11 years for her,” this reader asked. My suggestion: Use a balanced exchange-traded fund, a deservedly hot new product that gives you a fully diversified portfolio in a single package you buy through an online broker.
The big names in balanced ETFs are Bank of Montreal, BlackRock’s iShares lineup, Horizons and Vanguard. Each offers a range of funds with different mixes of stocks and bonds. For RESPs, you could go with a balanced ETF that is all or mostly stocks at the beginning, shift into a more balanced fund at the start of high school and then lock down the money into a GIC ladder or an investment savings account in the final year of high school (or earlier if you’re so inclined).
With a six-year-old, this reader still has time to go with an aggressive balanced ETF. Examples include the Vanguard Growth ETF Portfolio (VGRO), the BMO Growth ETF (ZGRO) and the iShares Core Growth ETF Portfolio (XGRO), all with a rough weighting of 80 per cent in stocks and 20 per cent in bonds. Expect fees in the range of between 0.2 per cent and 0.25 per cent, which is quite low.
Each of these ETF companies offers more conservative options this dad could look at when his daughter attends high school. For example, the Vanguard Balanced ETF (VBAL) has a 60-40 mix of stocks and bonds, while the conservative version of this lineup – the Vanguard Conservative ETF Portfolio (VCNS) – reverses that with a 40-60 mix of stocks and bonds.
Check your child’s RESP and see how it stacks up against the simplicity and cheap fees of a balanced ETF. I wish I had them when I was managing an RESP.
-- Rob Carrick
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Question: I understand that if you have a TFSA and hold U.S. citizenship that you must pay tax on any earnings to the U.S. government. Why is this so when the U.S. has a similar tax-free vehicle? Is anything being done to approach the U.S. government for equivalent status based on the tax treaty? – M.K.
Answer: Tax-free savings accounts are not considered to be “retirement plans” within the terms of the Canada-U.S. Tax Treaty. That means they are not recognized by the U.S. Treasury Department as being tax-sheltered. Any change in that would involve amending the Tax Treaty. I am not aware of any action under way to achieve that.
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Rob Carrick this weekend takes a close-up look at preferred share ETFs, which hold about $4.5-billion and have been a nightmare for the conservative investors who bought them for zero-drama dividends.
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Compiled by Globe Investor Staff