Parents, can you spare $2,500 before year’s end? If so, a great place to put the money is in your children’s registered education savings plan.
When you skip an RESP contribution, you run the risk of missing out on federal grant money that offers 20 cents for every dollar you add to an RESP to an annual limit of $500. In other words, you want to aim for $2,500 annual RESP contributions – 20 per cent of that amount is $500.
These are tough times for some households, so RESP contributions may have to wait. That’s fine because it’s possible to make up unused grant money. If you skip a contribution in 2021, you could contribute $5,000 next year and receive $1,000 in grant money. Key rules: You can get back one year of missed contributions at a time, and only until the year your child turns 17.
If you’re looking for a quick, easy, smart way to invest that last-minute RESP contribution for 2021, take a look at asset allocation ETFs. Consider these exchange-traded funds as a complete and diversified portfolio of stocks and bonds, tuned to various risk levels.
Babies and kids right up to the end of junior high school might have an RESP invested in a growth-oriented asset allocation ETF (mostly stocks), while a balanced fund (a modest tilt to stocks) might work for the early high school years. By the start of Grade 11 or 12, you’d do well to consider having the RESP in laddered term deposits that mature just ahead of paying annual tuition bills. You’ll sacrifice growth potential, but have zero stress about a stock market crash pulverizing a year or two of university expenses.
Another thought for a turn-key RESP is to use a robo-adviser. Banks can sell you their mutual funds for RESPs, but these products are all over the map on costs and performance. As in most aspects of investing, a low-cost solution based on ETFs makes good sense.
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Rob’s personal finance reading list
The best time ever for one type of charitable donation
Soaring stock markets offer an opportunity to donate securities to a charity. In doing so, you avoid realizing large capital gains.
Buy less, be happier
An argument that we’d be happier if we spent less money on things. Adding this item to the mix because there has been such a surge in consumer spending lately.
Retirement revolt
A U.S. financial adviser wrote about a survey that indicated the happiest retirees have at least US$500,000 in liquid assets like stocks, bonds, funds and cash in bank accounts. Many readers didn’t find this information helpful.
Who gets what?
A 10-point guide for parents deciding how much of their estate to allocate to their various children. From the Economic Times of India.
Ask Rob
Q: I recently read your article on Canadian depositary receipts (CDRs). I have been a long-time holder of Tesla Inc. (TSLA-Q) and plan on holding the stock until at least 2025. Considering that the stock can now be purchased as a CDR, I was wondering if you thought it would be a good idea to: Sell all my TSLA shares and repurchase the same dollar value in CDRs; do not sell my existing shares of TSLA but purchase any new shares as CDRs; or, keep my existing shares of TSLA and continue to purchase shares on Nasdaq whenever adding to my position.
A: CDRs, traded on Canada’s NEO Exchange, offer a way to buy a fractional piece of several popular U.S. stocks, including Tesla. A big advantage of CDRs is that they convert your Canadian dollars into U.S. currency at an institutional rate that is better than the one you get from your broker when you buy U.S. stocks directly. CDRs are also currency-hedged, which means your returns will reflect price changes in the underlying shares with no impact from Canada-U.S. currency fluctuations. I like the idea of keeping the Nasdaq-listed Tesla shares and buying further shares as CDRs. There doesn’t seem to be much advantage in selling your existing Tesla holdings, given that you’ve already paid the cost of foreign exchange. Also, there could be tax implications if the shares are held in a non-registered account.
Do you have a question for me? Send it my way. Sorry, I can’t answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
This calculator from a mutual fund company that helps you work through the question of when to start Canada Pension Plan retirement benefits. Note the break-even ages where delaying starts making you more money.
The money-free zone
Vintage Neil Young and Crazy Horse on Human Race, which you’ll find on the new album, Barn.
ICYMI
What I’ve been writing about
- A home buyer’s guide to managing the cost of improvements to fight climate change
- Consumer spending hit full speed as Omicron variant arrived. Might a touch of restraint be called for?
- ‘I have all my investments in mutual funds – is that the wrong choice?’
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Are your parents giving you money? • Why it’s time to stop shaming the renting lifestyle • Is now the right time to buy a house? • Why are young Canadians leaving the cities they love? • Eating in: How COVID has shifted our food spending • Crisis-proof your finances • Can you afford to live downtown? • The cost of kids
- ✔️ The housing file: The housing boom is ripping apart the financial fabric of Canada • Shut out: A well-qualified millennial home seeker throws up his hands after losing multiple bidding wars • Big city housing affordability is over – now what? • She sold her Toronto house to retire somewhere cheaper, but it didn’t work • How young adults and the whole country win with a tougher mortgage stress test for home buyers • Can’t afford your house? It’s likely not your fault
- 📈 Investing: Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you • The 2021 ETF Buyer’s Guide: Best Canadian equity funds • The 2021 Globe and Mail online brokerage ranking: Who’s best for investing … and answering the phone • Are these the stock market returns of a lifetime? • On the cusp of retirement and wondering about an ETF that pushes the limits on aggressiveness
- 💰 Your money: The five most important numbers for checking the health of your personal finances • Today’s freakishly low mortgage rates can’t last. What will pandemic home buyers do when they rise? • There’s a cost in money, isolation and family stress when seniors choose to remain in their own private homes • Taking CPP early can cost you $100,000 and limit your long term options • Fleeing the city for the suburbs? Watch out for higher property taxes, more cars and other costs
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob Carrick