RESP investments: timing is everything
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Registered Education Savings Plans (RESPs) are a real boon to education members saving for their children’s education.
Not only does interest earned on the investments inside your RESP accumulate tax-free until it’s withdrawn (when your child can declare the funds, and be taxed at a lower rate), but the $7,200 that the government chips in with the Canadian Education Savings Grant (CESG) is hard to beat.
However, as good as it is, there are things you need to know in order to maximize the benefits of an RESP, and timing is one of the most important.
How long you have to invest is a major consideration.
The investments inside your RESP should be geared to your time horizon (or when you’ll need the money). The difference with an RESP – and something investors find challenging – is that the time horizon is quite specific, and shorter, than the one you might have for other major objectives, like retirement.
Most students today start their post-secondary careers at age 17 or 18. Like longer-term investment plans (such as your RRSP), the general rule of thumb is to invest more aggressively when you have more time, and gradually become more conservative as you draw closer to the date when you’ll need the money. Here’s an example:
|Years Before Needing the Money||% in Equities||% in Fixed Income Investments & Cash Equivalents|
|12-17 years||Up to 100%|
|1-5 years||Up to 40%||60% or more|
Another way to manage the adjustment of your asset allocation is with a target date fund, which is designed to adopt a more conservative asset mix of stocks and bonds over time, until the portfolio reaches a predetermined target date. “The target date fund starts more aggressively, but then rolls down automatically,” says Educators Senior Financial Advisor Michail Tsirikos.
Your RESP asset allocation has to reflect your unique needs.
The example in our chart won’t work for everyone. Some advisors will warn against investing too conservatively, especially in the early years of the RESP, because it’s hard to predict how much your children will need. “You don’t know for sure what your child is going to do. Not only that, but plans change,” says Michail.
The point is, everyone is different. Some investors will continue with a higher percentage of equities for longer than we’ve suggested. For example, if you started your RESP a little later and have less than 17 years, you could continue your exposure to the stock market for longer, while watching closely for any major downturn in the market. (But if you’re contributing for a child who is 16 or 17 years of age, you should know that you’ll only receive CESG if a minimum of $2,000 was contributed before the end of the year they turned 15; or a minimum annual contribution of $100 was made for at least four years before they turned 15.)
Some investors might leave stocks in for longer if they have a family RESP with children of different ages – perhaps reducing risk for a portion of the RESP to cover an older child’s costs, while leaving a younger child’s money in a more aggressive mix.
What if you’re the type of investor who’s not comfortable with any risk? You could put the money in a GIC in your RESP account. You’ll still get the government grant, which many consider to be the main benefit of an RESP. According to Michail, “It’s cheap, safe and easy, and really you just need those grants.”
You can also use timing to maximize the benefit of the CESG.
By making the annual $2,500 contribution as early as possible in the year, you’ll receive the CESG faster, and over time maximize the interest you’ll receive.
The maximum amount of CESG – $7,200 – can be reached by contributing $36,000 ($2,500 a year for 14.4 years by the year the child turns 17). However, according to Macleans Magazine, the average student needs $65,698 for his or her four-year undergraduate program … so where should you put the rest of the money you’re saving once you’ve reached that amount? Some people choose to continue contributing to the RESP until the maximum of $50,000 is reached. You could also save in a Tax-Free Savings Account (TFSA) or an ITF (In Trust For) account for a minor child.
And finally… take the time to keep track of your investments.
Monitoring your education savings once a year is ideal, as different investments may have grown or declined in value over that time and changed your portfolio’s asset allocation. We can help rebalance your RESP if that happens, so you are not taking on more risk than you are comfortable with, or falling short of your goal.
Maximize the potential of your child’s RESP today by speaking with a financial specialist about how to monitor your program to ensure your education savings are on track.
Regardless of how many children you have, how old they are, or where you happen to be on the pay grid, our financial specialists can offer you a genuine, educator-specific investment strategy that works within your exact situation and budget. Because while the road to post-secondary education savings may be long and sometimes bumpy, it’s one journey that’s definitely worth taking.