ABC Stocks asked me to post about my RESP strategy. As mentioned in my post on “Having a Newborn – Getting down to business“, I plan on opening a TD e-funds account (non aff) and buying cheap index based mutual funds.

Why TD e-funds?

What I really like about the TD e-funds setup is that they only offer low management expense ratio (MER) index funds. This is great for the investor who likes to “do it yourself”. Why not buy ETF’s instead? As I plan on putting small amounts at time, index mutual funds are cheaper than purchasing ETF’s via commission. In addition, the TD e-fund MER’s are so low that they are comparable to the MER’s on ishare ETF’s.

The Strategy

We’re going to implement a global couch potato based strategy where the RESP money will be split between 4 index funds and rebalanced on an annual basis. The 4 index funds will consist of:

  1. Canadian Equity
  2. US Equity
  3. International Equity
  4. Canadian Bonds

As for the actual percentages of each stock, that will change as time goes on to reduce risk and volatility. Lets assume that the RESP Plan will start withdrawing on year 18:

Index 0-10yrs 10-14yrs 14-17yrs 18yrs +
Canadian Equity 30% 20% 10% 0%
US Equity 30% 20% 10% 0%
International Equity 30% 20% 10% 0%
Canadian Bonds 10% 40% 35% 0%
GIC’s 0% 0% 35+% 75%
Money Market Fund 0% 0% 0% 25%
  • As you can see, from years 0-10 (Growth), the equity portion of the portfolio will be aggressive to hopefully maximize equity gains over the 10 years.
  • Moving into years 10-14 (Balanced), the portfolio takes a more balanced approach between equities/bonds to reduce risk without sacrificing too much in returns.
  • In years 14-17(Capital Preservation) is nearing withdrawal time, which means that capital preservation are among the top priorities. To do this, most of the portfolio will be in bonds/GIC’s. The equity and bond allocation will slowly be reduced to 0 over the three years while adding to the GIC allocation.
  • Years 18+ are the withdrawal years which means that capital preservation is the top priority which will be achieved via investing in a GIC ladder. This will allow money to be available every year that the child is in school. The annual lump sum will most likely be kept in a money market fund until the money is needed.

There is some planning to do with regards to the timing of the GIC ladder, but this is the general strategy. How does my plan look? Do you have any suggestions?

If you want to do some more reading on the TD e-funds, Canadian Capitalist also has a ton of information on them.

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Wow, that’s almost exactly the same plan I have with my son (3). My daughter we got suckered in to CST when she was born (6) while I was younger and a little less savvy in the way of the finances. CST was a terrible mistake.

looks like a pretty solid plan to me…

Do you consider that you have to use all the money accumulated in the RESP for your children’s education?

If you try to maximize the free money from governement for RESP, you might end up with “too much” money in your RESP (depending on the choices made by your children about the type of studies, how much % you want to pay, etc.)

You could use the free governement money and growth from the portfolio (which are taxable in children’s name) and get back the capital in your RRSP (if enough contribution room) after the education is completed.

In other words, do you really need to be 0% equity after 18 years+?

Hey MDJ,

Just a few short months ago I opened a TD eFunds account and funded it in a similar fashion, albeit for my retirement as opposed to RESP. I altered the index picks and replaced the US Index fund with the European one. The US still scares me a bit and the EU is only getting stronger as a union.

30% International
30% European
20% CDN
20% Bond

Isn’t International similar to European?
TD International Index fund is part Europe, so you are getting many stocks twice with this portfolio allocation.

Personally, I did not pick Canadian stocks for the last 2-3 years because I was sure they would drop someday (they were always rising!!!) but they did not really drop. Sometimes, “personal feelings” do not work out.

Thanks for the link FT. Sounds like a good plan and I’m sure it will perform well.

Money Musing: Cash Instinct is right. The International already has a big portion in European equities, so you are highly overweighted in European. Avoiding US equities now after eights years or so of stinking returns is simply performance chasing, IMO.

If you’re planning on having a second child. You may also want to consider setting your plan up as a family plan.

Its gives you a little more flexability at withdrawl time where the funds do not necessarily have to be split 50-50 for each kid. You can still invest in eFunds.

FT,

Thank you for responding quickly on my request, very nicely summarized with useful information as usual.

ABC

MoneyMusing: I had both the international and European index in mine at the very start until I realized that the EAFE (International) is Europe, Australasia, and Far East . . . so by having both you are leaning heavily toward the European markets. That may be what you wanted to do, but I figured a nice mix of Canada, USA, and EAFE would be fine. I doubt the USA will go down forever, and even if it’s the next 3 years the dollar cost averaging, will pay off in the next years after that anyway.

FT: I think your plan is fine, My plan I have no bonds up front so the whole mix is Canada, USA, and EAFE, at age 10 I was planning on shifting things at about 10% a year over to bonds instead of the age bands. I figure after good years I’ll take a little bit more off the table to bonds and in bad leave a little more on so it gets tweaked as needed. I also plan on having my kids conditioned from birth to know that they should work for at least two years before post-secondary school and enjoy their youth a bit to figure out where they are going to go to school and pick what they want to do. That way they can save a good portion of their income to go toward school along with my help they should make it if they work all the way through. My contributions will probably not pay a full 4 years by that time.

FT – the CESG is the same for each child regardless if it’s an individual or family plan. The contributions and grants are tracked separately.

The only benefit of the family account that I can see is the potential saving of annual fees. You can transfer money from one sibling to another regardless if the siblings are in a family account or an individual account.

I haven’t decided if we are going to have two individual accounts or one family.

Mike

FT,

I’m not an expert, but my understanding is that the CESG amount is the same whether you use a family plan or 2 individual plans (if you were to have 2 kids). So if you put 2500 in each individual account, you’d get 500 of CESG in each. If you put 5000 in a family account, you’d get 1000 of CESG, with half allocated to each child.

Also, I found this on TD’s website (http://www.tdcanadatrust.com/planning/resp.jsp):

Family Plans: A family beneficiary plan is similar to an individual beneficiary plan, except that subscribers can name more than one beneficiary to the plan, provided they are all related to the subscriber by blood or adoption. The family plan provides the flexibility of sharing the assets within the RESP among the beneficiaries. For example, if you have four children named as beneficiaries and only two pursue post-secondary education, the RESP funds may be transferred to those two children within the plan without penalty.

One more thing – the Conservatives brought in some improvements to the RESP in this year’s budget. The new lifetime limit is 50k/child, and there is no annual contribution limit. I thought I remembered something about allowing plans to stay open longer (particularly useful for family plans) but I can’t find anything to confirm that just now.

“You can transfer money from one sibling to another regardless if the siblings are in a family account or an individual account.”

Four Pillars, is this really true?? I thought that sharing the money between children was really the main reason for family plans to exist.

Darren – I’ve verified this with my resp provider and it’s in the government online documentation so yes, it’s true.

It might be a bit easier to do it within a family account (which is an advantage) but there are no penalties or anything if you transfer from one ind. account to another.

I did a post on this a while back comparing the two, and other than the potential annual fees (which TD efunds doesn’t charge), there isn’t really much difference between the two account types. If anyone has other ideas on this then I’d love to hear it.

FT – (if we have more children)

Anything you want to tell us?? :)

Mike

Interesting, thanks for clarifying that.

FrugalTrader,

Thanks for the plan. Looks very solid. When you get around implementing this, could you please update us on the specific steps? Links to forms needed to be completed and time it takes to process them would be very useful.

It will be interesting to read about FT’s experience with opening an account. It might differ from Canadian Capitalist’s experience.

As pointed out by FT, Canadian Capitalist wrote a lot of things regarding RESPs with TD efund. I remember that Canadian Capitalist described his experience with opening an account:
http://www.canadiancapitalist.com/2007/11/05/investing-in-td-e-series-funds-for-your-resp

Note that comments from that blog spot talk about some downsides with TD efunds for people who are allowed additional CESG (people with family income under 76K).

WWABCCCFTD?

“What would ABC, Canadian Capitalist or FrutalTrader Do?”

I’ve got 2 young ones 3 and 1. The kids were given $10k each from their grandparents, with no strings attached. What would you do with the cash? Dump it all into a RESP of TD e-Series indexes or go straight to ETFs at Questrade?

$20k invested over 18 years at 8% would give each kid about $25k for school (assuming 2.5% inflation), is this too much? Should some be kept out of the RESP?

Assuming I can be named ABC:

$25k for school depends of where you live.

If there are 10 colleges and 5 universities within 2km of your house (Exaggeration), your kids will probably stay at home during school. If you live in the country and your kids will need to move, $25k is definitely not too much if you want to pay some of the fees associated with moving out. You will also have to consider the province you live in (school fees depend of the province).

Questrade offers RESP accounts for Free http://questrade.com/pricing/admin_fees.aspx (but I could not tell you if they are worth it or not).

However, by putitng the whole $10k in one year, you lose some of the free money from the governement. If I were you, I would open 1 account “family plan” and put 15k (5k per kid) this year and 15k in 2009 to get the full free money to get a guaranteed 20% return. By having a family plan, it will be 1 simple account to manage and if only 2 kids out of 3 (Example) are eligible, you still keep the free money (verification needed, no guarantee).

Whether you want Questrade or TD depends if you want to dollar-cost average or not (and how much it’s worth to you) Vs how much you are ready to pay in MER fees.

Hi Jordan, I know you didn’t ask but this is what I would do.

Regarding the decision between TD or Questrade – if you are not planning to make any more regular (ie monthly) contributions then go with Questrade. If you are thinking of doing regular future contributions at some point then TD is probably a better bet.

Another thing to consider is that to maximize the grant you should contribute $5,000 this year and $5,000 next year for the older child. For the younger child (who I’m assuming was born in 2007) you can put in $5,000 this year and then $2500 in 2009 and then $2500 in 2010. Or if that is too much trouble then just put $5,000 for this year and next year for both of them.

Mike

Hey sorry Mike, I respect your opinion too and I’d be thrilled if anyone else can offer suggestions.

Are the $5,000 chunks for dollar cost averaging, or what’s the reason for this over just lumping the whole $20k at once? How much are you guys planning to contribute to your RESPs?

Sorry FT that my post appeared twice before you removed one of the two, I do not know exactly why it happened.

For my reply that is above Mike’s reply (23), I implied that you have 3 kids, but you have 2 (I misread)… Mike’s answer is more comprehensive on the issue

The $5,000 chunks proposed by Mike are because of GESG
(http://www.hrsdc.gc.ca/en/learning/education_savings/public/cesg.shtml) that pay 20% return (or more depending of your family income) on the first $2,500 per kid that you invest any year in a RESP.

Hi Jordan,

I would only invest amount in RESP from where I can get maximum CESG benifit. Since, I do day trading and swing trading, I would open acount with brokerage (Questrade mostly) with rest of the moeny.

Thanks for the suggestions it should help a lot. I sort of assumed that with the new 2007 rules allowing you to make lump sum contributions that you would simply be automatically eligible for the CESG the following year if over contributed. Are you sure this doesn’t carry forward?

I agree with Cash Instinct that a single Family plan would be best for simplicity’s sake.

FrugalTrader: By putting the kid’s money into an investment or high interest savings account outside of the RESP am I exposing their grandparents to the CRA’s attribution rule where they’d have to then claim the kid’s income and pay taxes on it? Or is this unlikely to be a problem?

Thanks

Jordan – resp contributions are not like rrsp contributions where you can contribute a bunch now and then claim some or all of them later.

You get $2500 of “grant-eligible” contribution room per year and you can use two years worth at a time. So for the 1 year old you can contribute the $2500 from 2007 and $2500 from 2008 which gives you $5,000 for this year. Once you’ve used up any unused years then you only have $2500 per year to use. Any contribution above the “grant-eligible’ limit doesn’t get a grant ever.

I’m not sure about the attribution issue – seems to me the money would be in your name so you would pay the tax on any interest or dividends – but I’m not too sure about those rules.

Mike

Has anyone done a review of the TD Waterhouse RESP account? I’m not sure if it has the same limitations on additional CESG grants or CLBs that the TD mutual fund accounts have? The other thing is it has a $50/year fee unlike a Questrade account. Are there any other differences or benefits?

Hi,

We used RESP’s when the kids were younger. They are going to Uni now so we are looking at these things from the other end. I am not sure I like them very much.
They are a pain to get money out of, takes time and lots of paperwork. The thing I don’t like is that the interest is taxed in the kids hands when withdrawn, which may end up causing them to pay tax if they have another job, and also may affect how much tuition deduction may be transferred to you.

Every parent should put away any Child Tax benefits and especially the day care subsidy (Harper’s Hundred) into a child’s bank account (or informal trust) because the interest from that money is taxed in the kids hands every year. The daycare money comes to $7200. after 6 years and will grow tax free basically, unless your toddler has lots of income. It should pay for first year anyways.

Jan:

I think that’s a great idea, I wanted to do the same thing. But I have read mixed opinions online that the Universal Child Care Benefit may or may not be invested in a child’s name without attribution back to the parent.

Are there any tax people who know for certain if both benefits can be invested in the child’s name so the gains would be essentially tax free?

Frugal so are you saying Jan’s suggestion of investing the CTTB/UCCB would still result in dividends / interest being taxed in the parent’s hands?

For the informal trust you could just never tell your kid they have the account, if they’re crazy at 18, don’t tell them until they’re ready. Just let them try and find it if it comes to that.

Frugal, check out this quote I found regarding CCTB/UCCB on the CRA website:

“Generally, when you invest your money in your child’s name, you have to report the income from those investments. However, if you deposited Canada Child Tax Benefit or Universal Child Care Benefit payments into a bank account or trust in your child’s name, the interest earned on those payments is your child’s income.”

http://www.cra-arc.gc.ca/E/pub/tg/5000-g/5000-g-02-07e.html
(under Line 121)

So now I wonder is an “informal trust” account different from a “trust”?

I am doing the TD efunds RESP as well, but chose an individual plan for our daughter, but plan on having more kids, but since there will be an age gap, I wanted the flexibility to change each plans investments separately. Probably won’t, but maybe as my kids get older and learn investing I could give them some minimal control of “our” money.

My two cents, Spudman

Jan & Jordan, thanks for the info regarding the CCTB payments and interest being taxable in the child’s hands. I didn’t know that.

That’s quite useful if you don’t want to use the RESP – or have more money outside of it.

Mike

Just stumbled over this site. Very informative/interesting.

I have an RESP set up with TD, and am using e-funds in an agressive couch potato manner. (Agressive couch potato sounds like quite the oxymoron.)

Anyway, I have money deposited in three funds – Canadian Equity, U.S. Equity and International Equity – each month.

I have a question regarding the government cash that comes in as a result.

I tried to get it split three ways, so equal amounts get put into each fund. After initially being told this was no problem, I discovered a money-market fund in my account, and found the grants were being placed into it.

Asked TD again, and was told that the government funds CAN’T be put into e-funds, despite what I was told initially.

Anybody else have this problem? Is it correctable? Any info would be very appreciated.

Thnx

This is an excellent post/website. I am quite glad to have found it.

Please help me to make a RESP investment decision. I have a 3.5 years old son and a 1 month daughter.

Current RESP Plan for my son: Global Education Trust Plan
Invested till date: $6800 (since 2005)
Enrollment Fees: $4294, Principal:$1450 CESG/Growth:$1050
Rate or return: 5.5%, 5.5% and 4.7%.

I am thinking of moving from Global Pooled RESP to TD Efunds/Questtrade Family Plan for the following reasons:
1. Flexibility to select investment – It is all Bond investment; so low growth and risky during inflationary period (I guess bond prices would come down during inflationary period)
2. Better growth return
3. Will not loose income in case I move out of Canada (remote possibility)

If I move out of Global Pooled RESP, I will loose enrollment fees of $4294.

Hypothetical RESP compounded growth projections (assuming $2000 annual investment for next 15 years):
Global Pooled RESP @ 5% growth: 68,545.88
Global Pooled RESP @ 3% growth: 56,594.06

Self-directed RESP in TD e-funds/Questtrade (assume enrollment fees is deducted)
Self-directed RESP @ 7% growth: 71,746.20
Self-directed RESP @ 5% growth: 59,814.38

1. Please comment whether moving out of Pooled RESP now, loosing $4294, is a bad idea.
2. Which one is better? Monthly TD Efunds contribution for dollar cost averaging or Yearly (January) one time contribution in ETFs for higher compound growth rate (As money stays for one year longer)?

Thanks in advance,
JP

JP – that’s a tough situation to analyze.

As far as the enrollment fee goes – you’ve already lost that amount regardless of what you do, so that shouldn’t factor in the decision to move or not.

Sorry I forgot to mention. If I dont withdraw, my enrolment fees will be returned back when the payment starts. I have included them as part of payment in my Hypothetical calculations.

hey JP, if it helps with the decision, read about what i did in my blog
http://mecontra.blogspot.com/2008/09/resp-issues-with-usc-resp-heritage-resp.html

yes, I moved from pooled plans and lost 6K in the process…

about the actual numbers, i also have a table i made up for the same purpose – fill in your numbers.

question 1:
It says on the CESG site that
On the first $500 you save in your child’s RESP, the Canada Education Savings Grant will give you: up to $150, if your net family income is between $37,885 and $75,769,
When you save more than $500 annually, the Canada Education Savings Grant could add up to $400 on the next $2,000.

would that mean that I could get 550/ year grant money if I put $2500 ? or is there a cap of $500 grant money

question2:
unused CESG can be carried forward. so if our net family income is between $37,885 and $75,769 and we only put $500 into RESP to get the $150 grant. what is the amount of CESG that can be carried forward ? $400 or $350.

I am curious to know because we are planning to only put $500 on RESP to get the additional CESG for now and put the rest into our mortgage. then when we are done with the mortgage we can catch up with the RESP without losing out on the additional CESG bonus. Does that sound correct ?

Is anyone using BMO Mutualfunds and do they have something similar to TD e-funds?

I just opened individual RESP’s for my 6 and 2-week old sons at BMO Mutualfunds, the money is invested into their Intuition RESP Savings Portfolio with following distributions(i think):

50% GICs
38% BOND Fund
12% DIVIDEND Fund

and they say the overall MER of the portfolio is about 0.8%

Comments?

Thank you,

G.

@ jp

Wow that enrollment fee is outragous, you should report them to an investigative news service like Olsen on your Side to slam them with bad press.

If the pooled plan is strictly bonds, then maybe you could stay invested in it, but don’t contribute anything more. Start a second separate RESP account with TD e-Series and do your monthly dollar cost averaging contributions but don’t invest anything into the TD Bond index.

@ georumble.com

Their fund sound too conservative, you’ve got over a decade to invest and are very fortunate to be starting at a market low, you could take advantage of that by having more market exposure. Plus the MER is twice what you’d pay with TD e-Series funds.

Is TD the only bank that offers e-funds?

I know this is a bit off topic, but can you do some comparisons on fund companies in Canada? In the U.S., Vanguard specializes in low cost index funds; Fidelity usually has the best research tools; T. Rowe Price has a lot of analysts; Janus focuses on high-risk/high-return funds, etc. I wonder what the Canadian equivalents are like. In particular I want to know what the closest thing to Vanguard we have in Canada. Is TD the best for low cost mutual fund as FT suggests in this post? I’d appreciate the info.

Thanking in advance.

Albertans need to ensure that their RESP provider is able to get them the Centennial Savings grant of $500/child. In this regard, avoid Scotia iTrade (formerly eTrade) as it has made it clear to me that I’m out of luck with the RESP I have with it.