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RESP Portfolio Update – February 2016

It’s been a little over two years since my last RESP portfolio update which is probably an appropriate time span since it’s a fairly steady portfolio that is 100% indexed. The RESP portfolios for our children are setup with TD e-Series mutual funds which provide a low cost way to index the market.  We contribute $2,500/account/year to get the maximum contribution from the government of $500/account/year.  So basically $5,000 contributed to the RESP accounts give us $6,000 to invest.

We went with index mutual funds instead of index ETFs because of the freedom of adding small amounts at a time without having to pay a commission for every purchase.  Since opening the accounts, there have been some advancements in ETFs and discount stock brokerages (here is an updated comparison). If I were to setup an RESP account today, it would be a tough to choose between this and no-commission ETFs.

The original plan was be aggressive for the first 10 years (90% equities 10% bonds) for each child with increasing fixed income as the University tuition nears.  I copied the table from my RESP strategy article below.  I have since adjusted the first 10 years to have close to 75% equities and 25% bonds. I like to keep things simple, and having it setup this way will still provide solid long term results, while enabling me to make sure I have 25% in each of Canadian equity, US equity, International equity, and Bonds.  As of today, my oldest child is 7 and my youngest 4, so there are a number of years remaining before I start increasing bond allocation even further.

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%

Portfolio totals as of February 19, 2016

First (oldest child) RESP Portfolio (started 2nd quarter 2008):

Investments Units
Held
Price Per
Unit
Market
Value
%
Holdings
Book
Value
TD CDN Money Mkt 103.040 $10.00 $1,030.40 2.910 $1,030.40
TD CDN Index-e** 432.768 $20.90 $9,044.85 25.580 $9,119.55
TD US Index-e** 199.781 $46.01 $9,191.92 26.000 $4,940.76
TD CDN Bond Index-e** 571.675 $11.79 $6,740.05 19.060 $6,648.68
TD Int’l Index-e** 795.913 $11.75 $9,351.98 26.450 $7,673.85
Total as of Feb 19, 2016 $35,359.20 $29,413.24

Last Update Dec 2013

Investments Units
Held
Price Per
Unit
Market
Value
%
Holdings
Book
Value
TD CDN Money Mkt 400.53 $10.00 $4,005.30 17.47 $4,005.30
TD CDN Index-e** 228.59 $21.91 $5,008.45 21.85 $4,638.48
TD US Index-e** 151.737 $33.84 $5,134.78 22.40 $3,132.94
TD CDN Bond Index-e** 211.48 $11.12 $2,351.61 10.26 $2,412.36
TD Int’l Index-e** 589.70 $10.95 $6,424.33 28.02 $5,237.24
Total as of Dec 6, 2013 $22,924.47 $19,426.32

Second RESP Portfolio (started 3rd quarter 2011):

Investments Units
Held
Price Per
Unit
Market
Value
%
Holdings
Book
Value
TD CDN Money Mkt 253.911 $10.00 $2,539.11 12.150 $2,539.11
TD CDN Index-e** 228.430 $20.90 $4,774.19 22.840 $4,803.81
TD US Index-e** 111.818 $46.01 $5,144.75 24.610 $3,660.39
TD CDN Bond Index-e** 312.743 $11.79 $3,687.24 17.640 $3,644.66
TD Int’l Index-e** 405.127 $11.75 $4,760.24 22.770 $3,830.59
Total as of Feb 19, 2016 $20,905.53 $18,478.56

Last Update Dec 2013

Investments Units Held Price Per Unit Market Value % Holdings Book Value
TD CDN Money Mkt 251.84 $10.00 $2,518.41 23.50 $2,518.41
TD CDN Index-e** 129.93 $21.91 $2,846.85 26.57 $2,552.91
TD US Index-e** 46.66 $33.84 $1,578.94 14.73 $1,024.91
TD CDN Bond Index-e** 88.90 $11.12 $988.60 9.23 $1,027.24
TD Int’l Index-e** 254.18 $10.95 $2,783.28 25.97 $2,100.43
Total as of Dec 6, 2013 $10,716.08 $9,223.90

We started the first portfolio in early 2008 near the peak of the market so there was a point in early 2009 where the market value of this portfolio was significantly below book value.  It’s comforting to see that re-balancing with new money every year has brought positive results.  I have a bad habit of keeping a high percentage of cash, but I’ve done ok with this account.  But to be perfectly honest, I only recently deployed significant portion of the cash since we are undergoing a bit of a market correction.

The second RESP portfolio was started near mid 2011, which fortunately, was during a small market correction.  Since last update, I managed to bring the % holdings of each of the mutual funds to “near” target amounts.   There is still too much cash but I will be re-balancing again soon, likely into Canadian, International, and Bond indices.

So in conclusion, I find that indexing provides a steady, systematic, and low stress way of investing.  With another 9 years until post secondary education for my oldest child, and 12 years for my youngest, the accounts should have enough to cover most of their undergraduate degrees if they decide move away from home, and perhaps even pay for a post-graduate degree should they stay home.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 41 comments… add one }
  • Dwilly February 22, 2016, 2:27 pm

    Good stuff. I do the same for my kids, but use ETFs. They are only 5 and 2, so I have been able to take advantage of the free ETF buys you discussed, and the accounts cost me very little at all.

    Curious as to your BV numbers. Shouldn’t BV just be equal to your contributions? In the case of your older child, this would be 8x$2500 = $20,000 (or 8x$3000 = $24,000 if you include the CESG)? How do you end up with a BV considerably higher unless you are updating the BV when you sell/rebalance? And if that’s the case, why are you bothering to track that way in a non-taxable account?

  • 12-Minute February 22, 2016, 2:41 pm

    Hi,
    We recently decided to ease up on RESP contributions because of tax considerations. Even if the taxable portion of RESP withdrawals will only be taxed in the hands of our children, we still felt that the fiscal cost could potentially be higher.

    In today’s world, most students have summer jobs and part-time jobs during the school year. They probably won’t pay any income taxes because their revenue will stay under the “tax-free threshold” (around 12-13K$ for 2015 depending on their situation and provincial taxes). Significant RESP withdrawals could push their income over that threshold and ensuing taxes would more than offset RESP benefits. This is especially true when RESP investments provide good returns (we have maintained an average return around 14% since 2008).

    After we’ve estimated that RESP contributions were sufficient to attain the tax-free threshold, we felt that maximizing TFSA and RRSP contributions were better options.

    What do you think about it?

    • Francois February 26, 2016, 9:33 pm

      Have you calculated how much governmental funds you leave behind? Because paying back 20% or so on taxes on that is not that bad in the end. And you can keep your capital anyway if you need it for your RRSP or TFSA later and just give the interest and government grant to you kid. I think that if your kid and you can time the disbursements from the RESP properly over a few years, you can manage the taxes.

  • FrugalTrader FrugalTrader February 22, 2016, 2:42 pm

    Hi Dwilly, thanks for the comment. As for book value, those tables are pulled straight from my TD mutual funds account. Perhaps they adjust book value based on distributions?

  • FrugalTrader FrugalTrader February 22, 2016, 2:48 pm

    12-minute, have you run the tax numbers on the amount of tax your children will pay vs what you would pay in a non-registered account? Do you already have enough in the RESP to cover their education (assuming work part time), or do you plan to supplement with your TFSA?

    • 12-Minute February 22, 2016, 4:12 pm

      @FrugalTrader
      Very good questions!

      Comparing RESP vs Non-Registered account…?
      Grants get the RESP a step ahead but beyond the tax-free threshold, things gradually get even. In fact, at some point, the non-registered account gets back in front because RESP payments get fully taxed as opposed the non-registered withdrawals who get the preferential capital gain/dividend tax treatment.

      This probably won’t be true for everyone as on my ongoing quest to gradually stop working, my income still lands in the lower tax bracket (the same as my children).

      Do we have enough in RESP to cover education cost…?
      Probably not. But we don’t view the RESP as the unique way to fund education.
      Rather, we like to consider the fiscal implications and financial impacts of it on the whole family.

      Our children’s education will be funded in order by their part-time jobs, RESP payments, refund of RESP contributions (which is not taxable) and TFSA withdrawals as a last resort.

      • Francois February 26, 2016, 9:41 pm

        In your scenario, you anticipate that your kids will have a part time job and make enough hours or that it will be paid enough to have fiscal conséquences. But maybe your kids will prefer to study during the summer, or do unpaid internship or travel abroad, thus decreasing significantly the income they can get from their part time job. In that case, maybe RESP are better. It’s difficult to forecast the future…

        • 12-Minute February 26, 2016, 11:05 pm

          @Francois

          I would really prefer that kids would work less and focus more on their studies but they already have the intention to work full-time in the summer and about 15-20 hours during the school year. That’s their reality in today’s world.

          From my understanding, they will do it partly to fit in with their friends, because they are eager to gain independence and also to get some precious work experience.

          But don’t get me wrong, RESP are a great thing and you have to take advantage of it. I find it very sad that many lower income families leave all that FREE money on the table.

          My point was only that there may be limit to RESP advantages and at some point, a fiscal cost associated to it.

          With all the hindsight many of you provided, I also realized that the fiscal impact is complicated to estimate and that it varies a lot depending on your unique situation. My so-called “tax-free threshold” may even be irrelevant for most people.

          Another great reason to have these kinds of insightful discussions on a blog like this one.

      • Bob March 7, 2016, 7:07 pm

        Huh?

        What sort of rate of return are you assuming?

        If you contribute the max $2500/year for 14 years (to get the maximum lifetime grant of $7200 (on a total of $36000), and you assume a steady 5% rate of return (just as an easy example), this would only give you approximately $62,000 total ($36,000 contributions + $7200 grant, plus interest compounded).

        That would give you $26000 in accumulated non-contribution income ($62000-$36000).

        Even assuming your kid spends four years in University (likely 5 or more if they are also working at the same time, going for a post-graduate degree, post-degree certificate, etc.,), then that is still only ~$6500 of taxable income/year.

        If your kid is earning so much money during the summers and weekends that they can’t absorb $6500 without a big tax bill, then they probably don’t need your money anyway.

        And if you are assuming more than a steady 5% R.O.R., well, let’s just say I’m skeptical.

        • Bob March 7, 2016, 7:08 pm

          Plus — if the kids don’t need the money, you can roll it over into your own RRSP and keep the interest payments. So, what’s the downside in contributing to RESP again?

          • 12-Minute March 8, 2016, 12:02 pm

            Just to clarify things…

            – Without any assumptions, our actual R.O.R. has been around 14% (averaged) since I’ve managed the account myself (2008). That’s part of the problem!

            I know it’s a good problem to have… Still, it’s a very high return and we wouldn’t even dream of maintaining it…

            – The RESP lifetime contribution limit is 50000$ per beneficiary. In practice, the 36000$ limit is mostly used because of the annual grant limit. Our original plan was to get to the 50000$ limit assuming our kids would not pay any taxes on withdrawals.

            I probably was not clear before but I meant to discuss about contributions over the annual grant limit (36000$ over 14 years). I insist that it is NOT a good idea to leave grant money on the table!

            – With our very good return, significant tax considerations creeped in. With a 5% return, RESP would probably have remained the unconditional winner.

            – We don’t view RESPs as the only way to pay for education. Our family will be able to afford it anyway… On top of grant money, we rather try to use RESPs to be as tax efficient as possible (adopting a whole family perspective).

            That’s why contributing over the “36000$ limit” was an option for us.

            – It was probably not a good idea to bring that discussion here as, without all the details and implications, our unique situation cannot truly be analyzed by someone else.

            Thank you anyway for your input and rest assured, we won’t leave any free grants on the table!

  • nobleea February 22, 2016, 3:04 pm

    Why is there so much in cash? Doesn’t show up in asset allocations given the kids age, so I can only assume it’s because you’re trying to market time, which is the complete opposite of what you should be doing in a couch potato portfolio.

  • FrugalTrader FrugalTrader February 22, 2016, 3:08 pm

    Easy nobleea! :) Most of that cash was from 2016 contribution. It will dwindle down over the next quarter or so.

    • nobleea February 22, 2016, 3:20 pm

      But why is it in money market fund? With e-series you can buy/contribute to the funds individually. Rather than contributing to a money market fund, then moving around from there. Just seems like additional steps that aren’t needed.

      • Bob March 14, 2016, 6:00 pm

        I do the same as FT, principally to save on fees.

        I have two kids. If I split the RESP for each kid into four funds, that’s 8 funds. I COULD ask them to debit my bank account 8 separate times, but that exceeds my Bank’s free monthly withdrawal limit. So, by having them debit only twice: once for each kid, and then doing the divying up in TD (where it is free), I save some dough.

  • FrugalTrader FrugalTrader February 22, 2016, 3:24 pm

    That’s a valid point! I set it up the account so that my annual RESP contribution and CESG goes directly into the money market fund, then I redistribute from there. You may be onto something here, it might be easier if I just contribute to each fund directly.

  • Dwilly February 22, 2016, 4:03 pm

    @12-Minute: Interesting thought. But I’m not sure if the numbers add up? I am no accountant, but isn’t it true that you can deduct education costs (tuition, books, certain other expenses) from income? So if that’s the case, then you would withdraw an amount from RESPs greater than the basic personal exemption, but the student would still pay no income tax, as long as he/she had sufficient expenses to bring net income back down?

    In fact the only way that what you are describing (employment + RESP income pushing you into taxable territory) would happen is if your student part time employment income + RESP income less eligible school expenses was still more than the basic personal amount. Seems pretty unlikely to me? That’s one really well funded student!!

    • 12-Minute February 22, 2016, 5:26 pm

      @Dwilly

      The “tax-free threshold” varies a lot from province to province and it may be much higher than ours.

      Being from Quebec, deductible education amounts are quite low. Tuition fees are much lower than in other provinces, especially for the first 2 Cegep years at virtually zero. And only $65/month can be deducted for books.

      That’s why our “tax-free threshold” can be so low and it will be a tad higher for varsity years (between 15K$ and 20K$).

    • Anne November 13, 2016, 12:51 am

      Beginning in 2017 the feds and provinces are doing away with the education and textbook credits. The tuition credit remains. (And it is a credit not a deduction.) Therefore a student aiming to pay no tax on the RESP EAPs would want to keep their taxable income below the lower of the federal or provincial basic personal credit. For example in PEI the formula would be
      (RESP EAPS + other income) – tuition < $8000

  • nobleea February 23, 2016, 12:00 pm

    Biggest thing missing from this update is the XIRR.

  • My Own Advisor February 24, 2016, 11:12 am

    Very well done. Kudos to you guys for such a disciplined and simple savings plans for your kids.

  • DA February 24, 2016, 12:12 pm

    I wish i knew about doing self directed investment in RESP before. I did invested in the bank, and it was in money market fund. Anyway, the time is over and the kid is in university now. Glad that I learned about self directed RRSP and TFSA. Thanks to the many personal finance blogs, now I have self directed RRSP and TFSA. I have to move my RRSP invested with IG. till last year. Think, I will find an article about that soon.

  • Peter February 24, 2016, 1:19 pm

    My kids are of the same age (7 and 3) as yours, FrugalTrader. I have their RESP in e-series funds as well but with little more conservative approach than yours. I have 60% in Equities and 40% in Bonds.

    I wanted to ask if you are contributing regularly in e-series funds (throughout the year) or in the middle of the year, how do you allocate the funds? Or do you wait until a year has gone by to re-balance the portfolio? And do you wait until the CESG has arrived because that takes about 6 to 8 weeks.

    • FrugalTrader FrugalTrader February 24, 2016, 1:41 pm

      Good questions Peter. On Jan 1 (or close), I contribute the full $2500. At that point, I don’t have a set formula on what to do, but distribute the funds throughout the year as I see fit. Technically, I should just close my eyes, and simply rebalance the portfolio once a year when the money is available.

      What about yourself? How do you rebalance?

      • Peter February 24, 2016, 2:46 pm

        I contribute the full $2500 as well (could be any time during the year). I then wait for the CESG to arrive and then rebalance. I don’t know if that’s a good strategy but I don’t wait for the year to go by.

  • TheEntitledMillenial February 25, 2016, 3:07 pm

    Great post! I was just thinking about this topic the other night (which is strange because I have no girlfriend — let alone any children haha!) and how I would do an RESP with my broker. The comments have been informative as well. I know in Saskatchewan at least it would be hard to push a student into territory where they pay taxes, the deductibles for tuition and textbooks are generous. There is also a nice graduate retention program for the province so its unlikely you will pay much tax for a few years following school. Good on you for taking care of your kids future.

    TEM

  • yu February 25, 2016, 4:25 pm

    Just curious, what are the advantages of keeping the two accounts separate?
    I also have my first child’s RESP invested in e-series, and the account’s type is “family”. Now that the second child has arrived, I wonder if I should open a separate account or keep investing in the same account? Or perhaps they would separate the “family account” into 2? TIA

    • FrugalTrader FrugalTrader February 25, 2016, 4:46 pm

      Hi Yu, my understanding is that even though you have a family account, each child will require a separate account. Perhaps it’s a requirement of assigning a SIN to an account to receive the CESG. At least that’s how we have it setup.

      • B February 25, 2016, 6:04 pm

        At TDDI, I have a single family account for both children. The benefit is less fees (for TDDI RESPs, there is a $50/year/account fee for accounts under some threshold) but then you are left with a single pool of money. If for some reason you need to track each child’s amount separately then you probably want to have separate accounts, and probably a plain old TD MF RESP that has been converted to eSeries.

  • Greg February 25, 2016, 7:20 pm

    This is great! I’m sure your children will be quite grateful for putting your financial knowledge to better their life and education. I wish my parents started RESP for me growing up, but I had to pay for University the not so fun way. I’ll definitely keep this stuff in mind for when I have kids, I want to make it easier for them.

  • Kailash February 26, 2016, 2:18 pm

    This is great! I’m sure your children will be quite grateful for putting your financial knowledge to better their life and education. I wish my parents started RESP for me growing up, but I had to pay for University the not so fun way. I’ll definitely keep this stuff in mind for when I have kids, I want to make it easier for them.

  • Susan February 26, 2016, 9:15 pm

    Just got our statements and our account LOST value last year. I am thinking of moving accounts but I have the following challenges.
    1. The advisor is a former colleague / friend. I use friend loosely as we don’t have any social interactions.
    2. The boys are 15 and 20 so not sure if there is any point in moving at this point.
    3. We also have a small (less than $2000) LIRA invested the same. Is it worth moving such a small amount (it was worth more but I let my husband manage it before. He liked Nortel. Need I say more?)
    4. I don’t know where to move this if I do. Couch potato?

    Any advice?

  • Jeremy February 26, 2016, 9:20 pm

    What I’m most curious about is how FrugalTrader will handle the transition once his eldest child turns 10. Is it a same-day cut-over? Time the market? Slowly change contribution amounts?

    It’s nice to have these target distributions but being that he already has trouble maintaining the target balance a transition can be especially tricky.

    • Geoff March 10, 2016, 11:10 am

      I’m struggling with this too, my son is 9 and right now it’s about 83% equities and 17% bonds. My solution has been to shift 100% monthly investments into bonds/money market funds. So in about a year I should be at about 25% bonds, and then up about 10% each year. We’ll see though. I’m aiming to be at 75% bonds and 25% equities by the time my son is 18.

  • Ahmed April 14, 2016, 10:33 am

    Question/comment about RESP catch up for prior years. My bank said I could contribute $2500 per child in the current year as well as another $2500 for the previous year. Then the rep said I could do the same thing next year to catch up for previous years. Is this true or did I misunderstand?

  • Paul April 15, 2016, 2:26 am

    Hi,
    Can you please tell me where on the web I can learn how to setup a self directed RESP?
    Thanks, Paul.

  • Murph November 11, 2016, 10:41 pm

    Hello FT,
    Following the tips on this site helped me open our family RESP for our three kids. I went with Questrade and it was very easy and painless.
    We have some catching up to do as my kids are 8, 6, and 3. Am I correct to think you need to accumulate $37K per child to get the maximum CESG of $7200?(So it isn’t necessary to max out at the 50K, really)
    The question I really wanted an answer to, is whether there can be more than one RESP per child. My in-laws also want to contribute for all their grandchildren on their own. Can they set up a separate family RESP for my kids? Or three individual RESPs?
    Cheers,
    Murph

    • FrugalTrader FrugalTrader November 13, 2016, 8:41 am

      Hi Murph,

      Yes approximately 14.4 years of contributions or $36000 total to max out the government CESG match. My understanding is that you can have multiple RESP, but the $50k lifetime limit applies. (http://www.fcac-acfc.gc.ca/Eng/forConsumers/lifeEvents/payingPostSecEd/Pages/Register-Reacuteg.aspx).

    • Susan November 13, 2016, 12:29 pm

      Yes you can have multiple RESPs. We had one for the kids which had a pitiful amount in it due to other expense priorities. My parents set up RESPs for them as well and maxed out the contributions in order to get the CESG amounts. And when we draw out (which we haven’t done yet so this is the theory only), we can identify what we are withdrawing: contributions, CESG, or earnings. My idea is that the contributions (which are withdrawn tax-free) will be returned to my parents and the remaining amounts are for the kids. My parents are therefore forgoing the return on their money but they are such low risk investors that the current market would not have generated very much anyway.

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