Tag Archives: Registered Education Savings Plan

My Child Is Now 15 (Or 16) What Should I Do with My Self-Directed Brokerage RESP?

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Managing an RESP is easy for the first dozen years. You have to make some decisions at the beginning. (Family plan? Individual plan? Bank? Brokerage? 100% safe savings accounts and GICs only? Some risk with equity investing in stocks through ETFs or mutual funds or individual blue chip investments?) After a while, though, you fall into an investment pattern and just stick with it. But as your child (or eldest child) nears the age of starting post-secondary school education, you need to make some decisions again.

First: Move the Money for First Year Into Risk-Free Investments

If your child is going to attend a university and live in residence for their first year after high school, you can estimate that they will need at least $20 000. Programs like Engineering will cost more. Living at home might cost less. But $20 000 is a good starting estimate and it’s likely they will actually need more than that for a university program, unless you live in and they want to attend university in Quebec.

You may have that $20 000 invested in equities. It may be in a mirror-the-stock-market ETF, a mutual fund, or shares in specific companies. If, the week before you need to take it out in cash to pay for residence or fees, the stock market has a sharp pull-back you could be in trouble. A 10% drop in the equity market might drop your $20 000 to $18 000.

Many people who have RESPs with over $20 000 in them could probably delay liquidating the equities in the RESP for a while. They could find the money to pay for residence and tuition in other places, like their emergency fund. But that might not be a great idea: it can take a year or more for the market to rebound. And, of course, there is no “stop limit” that guarantees it will only decline 10%. It could crash like it did in 2008-2009 and take years to claw its way back up.

So if you’re risk averse like I am, you will probably want to get that $20 000 for first year into something risk free before it’s needed. When your child reaches the age of 15 or 16, you may want to put that $20 000 into a cash account or a GIC or term deposit of some kind. I’ll be checking the rates offered by various investments at BMO InvestorLine soon.

Next: Consider WHERE You Want to House Your RESP While Your Child Is Making Withdrawals

According to the CRA information for RESP providers (like banks and brokerages) once your child starts making withdrawals from the RESP, you cannot move the RESP to another institution!

So in the year or so before your child graduates from high school, you should evaluate your RESP provider. Are there fees to make withdrawals from the RESP? What type of paperwork will the provider require to make the withdrawals? Would it be easier to move the entire RESP to another provider with lower fees or less paperwork?

Reading about some of the strange requirements for RESP withdrawals that others have experienced in the past makes me nervous. Soon, I will start looking at the rules at BMO InvestorLine and deciding if they are acceptable. If not, I will need a few months to get the investments transferred elsewhere. So I’ll want to make the decision long before my child is in final year at high school.

Finally: Develop a Strategy for the Next Few Years for the RESP

If you have more than one child, you also may need to plan a strategy for the RESP. When will you liquidate any equity holdings? Will you sell them when a certain profit is achieved? Or will you sell them based purely on the time at which the money may be needed? Will you buy a series of GICs with 5, 4 and 3 year terms, or only use 1-year terms?

How will you make the division of the loot equitable? What if you liquidate the equities for your eldest child when the market is high but when you go to do the same for your youngest child the market has been down for years? Do you “owe” each child the same number of dollars for their education? Will you “hold back” some of the money from the eldest child in case you need it to keep things even for the youngest of several children?

It’s better to develop a strategy before the first child starts using the money. Which means my husband and I have some thinking to do!

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How much money do you expect your child to need for their first year of post-secondary school education? Will you try to set that amount aside in cash or fixed income investments a year or two before they finish high school? Please share your views with a comment.

Advantages and Disadvantages of Holding a Self-Directed RESP Account at a Discount Brokerage

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When you first start a Registered Education Savings Plan you usually don’t have much money in it. But if you are able to contribute enough each year to receive the maximum Canada Education Savings Grant, and especially if you have more than one child and you can contribute $2500 each per year, within a few years you may have over $10 000 in the account. That’s when many people begin to think about ways to maximize their returns and to resent the fees they often have to pay for mutual funds. One option to consider is opening a self-directed RESP online brokerage account so that you can choose GICs from a variety of places or invest in stocks, ETFs and mutual funds; this article lists some of the advantages and disadvantages of RESP brokerage accounts.

Pros for Holding your Children’s RESP at an Online Discount Brokerage

If you wish to invest in Guaranteed Investment Certificates, you are not limited to the ones offered by a single bank which may only offer low interest rates. For example, if your RESP is at BMO InvestorLine, you can buy GICs from over 10 financial institutions including Home Trust and Equitable Bank both of which often pay rates significantly higher than the major Canadian banks.

You can invest in a mutual fund which mimics a daily interest savings account. The going rate is usually slightly less than paid by online banks such as PC Financial and Tangerine. (For example 1.2% vs 1.3%.)

You can buy units of low fee Electronically Traded Funds, ETFs, that mirror the performance of major stock exchanges such as the TSX or the NYSE

You can usually select mutual funds offered by a large variety of financial institutions with no fee required for the purchase and no penalty for selling the fund after holding it for 90 days (no load funds.) If there is a specific fund you wish to invest in, though, be sure to check that the brokerage offers that fund before opening your brokerage account. Each brokerage offers slightly different investment choices.

You have total control over how the money is invested.

Making new contributions to the RESP is usually as simple as a typing a few numbers on a screen and clicking enter. (No more sitting through sales pitches disguised as contribution meetings at your bank.)

You can check the details of your account and its earnings almost any time. You do not have to wait for quarterly or annual statements.

You can arrange to have contributions made automatically to your account on a monthly or annual basis. (This is also true of RESPs held at banks and of group RESPs managed by private companies.)

Cons for Holding your Children’s RESP at an Online Discount Brokerage

Many brokerages do not allow you to apply for all of the matching government grant programs. If you are planning to apply for grants in addition to the standard Canada Education Savings Grant, CESG, check with the brokerage to find out whether it supports the desired program before opening an account.

You may need to have a large minimum balance to avoid paying annual fees. (There is at least one exception to this.)

No one will provide you with guidance or advice about what to buy.

You will have to choose how to invest your money and if you lose money because of your choices there is no way to recover it.

If you wish to invest in GICs you may find the minimum purchase amount is very large. For example, the minimum at BMO InvestorLine is $5 000 per GIC.

If you wish to invest in a daily interest savings account fund, the minimum purchase amount may be large. For example, at BMO InvestorLine you have to keep a minimum balance of $5 000 in the fund, or sell all of your units.

A mutual fund you wish to invest in may not be offered for sale by your brokerage. For example, no brokerage currently offers the Tangerine mutual funds. Check before you open an account.

Occasionally there may be a minimum investment requirement for a mutual fund. This tends to be set by the mutual fund company, such as Steadyhand, however, not usually by the brokerage. If it’s a concern, check before opening the RESP account.

You will usually have to pay a commission fee each time you purchase or sell shares of a company or units of an ETF. The commissions vary from about $7 – $10 depending on the brokerage. Some brokerages may waive the purchase commission for some or all ETFs.

If you are planning to use a dividend re-investment program for shares or stocks in the RESP, be aware that

  • Brokerage accounts offer a synthetic DRIP. You will only get a new share or shares if your dividend payment is enough to purchase one or more entire new shares of the company. You cannot buy fractional shares in a brokerage account.
  • Each brokerage has a list of stocks and ETFs that for which it offers a DRIP. You may not be able to DRIP all ETFs or all stocks. If this bothers you, check whether the stocks and ETFs you want to purchase are eligible for a DRIP before you open a brokerage account at that institution.

If you transfer in your RESP from another institution, you may or may not be provided with good information easily about how much of the plan comes from your contributions, how much from the government grant/s, and how much from earnings made by the investments. I strongly recommend you keep clear records yourself!

The brokerage usually does not have any mechanism to stop you from over-contributing to the RESP. You should keep accurate records yourself about your contributions and make sure you do not exceed the $50 000 limit per child. Also, it will not warn you if you are contributing more than is needed to get the matching CES grant for that year.

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Do you host your RESP at an online brokerage? Have you run into any other drawbacks that you’d like to warn us about? Please share your experiences with a comment.