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Using a GIC Ladder for RESP Withdrawals

I recently received a reader question about how to effectively use GIC’s with RESP withdrawals. 

I have a question in regards to moving funds towards GIC’s. My son turns 17 later this month and his RESP portfolio has $70k. This month I would like to start moving funds into Money Market Fund and GICs. While Money Market is pretty straightforward, I am not exactly sure how to incorporate the GIC’s at this stage of the RESP journey. Can you please provide some advice on his? Thanks for the great posts!

Backgrounder

For those of you new to these acronyms, a GIC stands for Guaranteed Income Certificate and will provide you a slightly higher interest rate than savings accounts, but with the condition that you keep the money locked in for a specific time period.  Some GICs will allow you to withdraw early but will come with a penalty.

An RESP stands for Registered Education Savings Program (my article with RESP details) and is a way for parents to invest in their children’s future education.  Contributions are after-tax (ie. no tax refund), but the account grows tax-free.  While withdrawals are taxable, they can be taxed in the student’s hands.  So essentially, providing the student has little income while they are in post-secondary, the withdrawals will face very little tax. 

The icing on the cake is receiving the government matching grants on contributions.  Essentially, the government will top up your contribution by 20% to a maximum of $500.  Doing the math, that means contributing $2,500 into an RESP will result in receiving the maximum $500 grant from the government.

Related: Low-Cost Discount Brokers for RESPs

Asset Allocation and Reducing Withdrawal Risk

Investing within an RESP is similar to investing within an RRSP, but with a compressed timeline.  With a traditional RRSP timeline, you have 40+ years to invest and compound, then another 30 years of decumulation.  The longer timelines allow for some flexibility if mistakes are made.

A traditional RESP, on the other hand, only allows for 17 years of portfolio compounding, then only 4-5 years of decumulation to pay for tuition (if you have a family RESP, any excess can be used by a sibling and stretched out longer).  The relatively short timelines leave little wiggle room, which means a major market correction combined with large withdrawals could simply mean not having enough money in the RESP to complete a degree (see my article on the sequence of returns).

In saying that, it’s a high priority to protect against market volatility while the student is in post-secondary.  To do that, the main idea is to reduce or remove market exposure. 

Here are a few ways to obtain a return without equity exposure.

  1. Go to Bonds – While bonds are known to be less volatile than equities, they can still bounce around.  For example, popular iShares XBB fell 7.7% from June 2016 to the end of 2018.  On a $50,000 RESP balance (like for my daughter), that would $3,850 less to spend on tuition and books.  However, since then, XBB has recovered 6.7% which is fine during the accumulation phase, but the drop would have hurt during withdrawal time.
  2. Go to Cash – To be 100% safe from volatility, the best bet would be to go to cash.  While cash earns very little, this can be offset by small interest offered by money market funds, or if you are willing to lock in your money for a higher interest rate, the use of GICs and/or stacking them to create a GIC ladder.  More on this in the section below.
  3. Combination of Cash and Bonds – If you would like to take a little more risk to try to squeeze out the extra return, consider a combination of cash and bonds.  The more comfortable you are with risk, the higher your bond allocation.  Personally, if I need to withdraw money from the account over the next 4-5 years, then I’m going to cash.

Using a GIC Ladder

As mentioned above, one of the surest ways to ensure that the money will be there when you need it is to go to cash.  While cash will not grow like the market over the long-term, there are ways to maximize short-term cash savings.  

When the student starts post-secondary, the RESP will need to last as long as possible, hopefully for the term of the degree (4-5 years).  Since money is needed annually, it would make sense to have cash available in 4-5 tranches. This is where a GIC ladder can come in handy.  

A GIC ladder is where you split your capital into equal portions and invest in GICs with variable terms/maturities (from short to long term).  As each term expires, the released cash is used or re-invested into a longer term.

For example, listed are some GICs with varying maturities and rates (using EQ Bank products as an example since they tend to offer the highest rates): 

  • 1 year: 2.55%
  • 2 year: 2.65%
  • 3 year: 2.70%
  • 4 year: 2.75%
  • 5 year: 2.90%

Say that you have a $40,000 in cash that is ready to be deployed towards post-secondary education (or other education that qualifies), and each year requires $10,000.  Assuming a 4-year degree, the initial $10k will need to stay liquid to pay for initial expenses.  However, the remaining $30k can be put into GICs to maximize the return with minimal risk.

The GIC ladder would look like:

  • 1-year GIC: $10,000 ($10,255 value at maturity)
  • 2-year GIC: $10,000 ($10,537.02 value at maturity)
  • 3-year GIC: $10,000 ($10,832.07 value at maturity)

While not a huge gain, this example resulted in an extra $1,625.09 which is perhaps enough for a few sets of textbooks. Not a bad return for minimal effort and risk.

Final Thoughts

Since spending an RESP balance usually occurs over a short 4-5 year time frame, it’s important to keep the volatility of the portfolio to a minimum (market drop early in the withdrawal phase could be disastrous).  Volatility can be mitigated by going to cash during this phase.  However, going to cash doesn’t necessarily mean a 0% return over the next 4 years.  Creating a simple GIC ladder can result in maximizing your cash (see example above) while ensuring that the money will be there when you need it.

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FT About the author: FT 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.

{ 7 comments… add one }
  • Avatar Kari July 16, 2019, 4:23 pm

    We invest our children’s RESPs through Bank of Montreal. As our eldest was approaching university age, our BMO advisor informed us that students can withdraw funds from a LOCKED-IN GIC in their RESP. It seems too good to be true, but it is! You can save your funds in the longest term (ie typically the highest rate) locked-in GIC, but your student can still access what s/he needs each year. You don’t have to cancel the whole GIC, just remove the funds they will need for that semester and leave the rest. No more trying to guess years in advance how much s/he will need for each year of school.

    • FT FT July 17, 2019, 10:11 am

      Hi Kari, thanks for the info. I’m interested in learning more about that GIC. Do you have a link? So essentially, it’s more like a high-interest savings account?

      • Avatar Kari July 17, 2019, 11:03 am

        I would say it acts like a redeemable GIC even though it’s not. You can’t add funds to it, as you would in a HISA. But you can withdraw during the course of the GIC term and the remainder keeps earning interest at the stated rate. Since non-redeemable GICs tend to pay higher interest rates, it’s a great feature. It’s not one specific GIC product, but more of a policy for all GICs in RESPs during the withdrawal years. I’m unsure if this is something only BMO features or if it’s true of all RESPs everywhere, so check with your provider.

        • FT FT July 19, 2019, 11:01 am

          Thanks for following up Kari!

  • Avatar GYM July 18, 2019, 5:15 am

    Great post! I still have some time until we need to withdraw.

    Love EQ bank, I just bought a GIC the other day (though very short term), can’t beat a 3.00% 3 month GIC!

  • Avatar Big Cajun Man (Alan W.) July 18, 2019, 8:02 pm

    That is something I never really thought of. I lived through TD Mutual Funds, and it was not Great but not Terrible. The rebalancing for me always ended up using new moneys going into and the Education Bond money to move around. The Education Bond money always appeared in a Money Market Account, but I invested the RESP money in E-series Index Funds (eventually for a while they were in crappy TD I-series funds). GICs might be interesting if you are worried about losing funds.

    • FT FT July 19, 2019, 11:00 am

      Alan, are you in the RESP withdrawal stage yet?

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