Many readers have e-mailed me asking about how to set up self-directed RESPs. We’ve discussed RESPs in many earlier posts and you can find everything you need to know about RESPs and the Canada Education Savings Grant (CESG) on the Government of Canada website. For the purposes of this post, I’ll assume that you are familiar with the basic rules of RESPs.

Regular readers know that we have RESPs set up for our twin two-year old boys with TD Bank’s e-Series index funds. Our plan is to contribute just enough to get the maximum possible matching CESG grant. In prior years, the maximum CESG was $400 per year (for a $2,000 RESP contribution) but the current maximum is $500 per year (for a $2,500 contribution). We used to contribute $2,000 per year but starting next year, we plan to bump up the contribution to $2,500.

Since the boys are still very young and a long way from going to University, I can afford to take more equity risk with their portfolio. As a result, the target asset allocation for their education funds is: 20% bonds, 20% Canadian equities, 30% US equities and 30% developed market equities. Once you have the target asset allocation, investing your contributions is as easy as looking up the mutual fund for the corresponding asset class:

TDB909 – TD Canadian Bond Index – 20%
TDB900 – TD Canadian Index – 20%
TDB902 – TD US Index – 30%
TDB911 – TD International Index – 30%

The portfolio will be rebalanced to the target allocation once every year when a new contribution is made and the matching CESG grant is received. Assuming a modest 5% return and a total contribution of $36,000 over the years (to get the maximum allowed $7,200 CESG match), the total portfolio value will be $78,830 in 2023. According to this chart, post-secondary education will cost an estimated $94,420 in that year. At a more optimistic 6.5% rate of return, the RESP portfolio will just about cover their education costs. You can model your own contribution schedule and play around with return assumptions using this spreadsheet.

This article has 33 comments

  1. The spreadsheet link just returns a 404 error…

  2. The HRSDC website hasn’t been updated with the changes from this year but most of the info is still accurate.

    Mike

  3. Hey CC,

    I also use eFunds for my kids RESP as the costs are hard to beat for something you can invest in one a monthly basis. I have taken a bit of a more aggressive stance with their RESP as they have the US Index and bond index, but I have also put in a dividend growth fund (you know me!). It has done well and is relatively maintenance free at this stage of the game.

    The Dividend Guy

  4. I forgot to ask – can you still set up an RESP with TD with no annual fee? Or is that only for accounts over a certain amount?

    Mike

  5. Hi CC:
    Great post about the RESP. I know that you can get a “family” RESP account now, so you can have one account cover more then one person. I have been having a very hard time finding out what the rules are with the family account. For example, is the CESG grant value increased, say $1000 per year if you have two kids listed? Would any contributions have to be attributed to a specific kid? If anyone knows of a good link explaining the variations with single and family accounts I would appreciate it very much if the link could be posted. Cheers

  6. Canadian Capitalist

    George: My bad. I’ve fixed the link. Hope it works.

    Mike: I noticed that the HRDC info has not been updated with the changes introduced in the budget. I should have linked to your RESP post instead 🙂

    TDG: I don’t think the exact percentages of equity allocation really matter as long as we pick an asset allocation and stick to it. Like you, I am looking for a low maintenance portfolio that I don’t have to tinker with at all.

  7. Canadian Capitalist

    Dan: I am making a post tomorrow on RESP basics covering all the rules I can think of. The RESP plans I have set up for my kids is a family plan. But contribution rules are exactly the same as for individual plans. The only difference is that the beneficiary can be any child in the family.

  8. Dan – the contributions have to be attributed to each beneficiary in a family account. In CC’s case, he probably set up the resp so that 50% of the contribution went to each son.

    Mike

  9. Quick Lunar Cop

    BMO also offers a calculator to estimate the cost of education. It includes options such as whether the child will live at home, expected return, and percentage of cost you want to cover.

    http://www.bmo.com/mutualfunds/ps/intuition/savings_worksheet.html

  10. Canadian Capitalist

    Mike: I don’t have to do any attribution. Two family RESP accounts are set up for each of my kids (I believe each account has a “main beneficiary”). The only difference is when the time comes to withdraw, the funds can be used for either child’s education. At least, that is the set up that TD Mutual funds follows.

  11. CC: Why have 2 family accounts? Is it to allow $2500 contribution per child as oppose to $2500 per plan?

  12. Canadian Capitalist

    QLC: That’s an excellent worksheet. I have bookmarked it. Thanks.

  13. CC – if you have separate accounts for each kid then are you sure they are not individual accounts?

    You can open up a family account or an individual account for each child but normally for multiple kids you would either open up separate individual accounts for each kid or open one family account for all the kids.

    If you have more than one child (beneficiary) on a family account then you have to assign the contributions to each beneficiary.

    I’m not familiar with TD’s resp so I might just be mixed up on their terminology.

    Mike

  14. Canadian Capitalist

    Dan: I am bit unclear if you are allowed to have one plan for both kids. TD Mutual funds explained that I have to make two applications for family plans – one for each child. The 1st beneficiary in the first application is the 2nd beneficiary in the second and vice-versa.

    Not sure if other institutions allow you to have one plan for one family, which is much simpler. Maybe others who have family plans can comment…

  15. Canadian Capitalist

    Mike: I am pretty sure both RESPs are family plans. I just checked online and the account is even called “Mutual Fund RESP – Family Plan”. I’ll check my application documents again this evening just to be doubly sure.

  16. Ok, you had mentioned there were two accounts which confused me as I would expect a family plan to be in one investment account. However, it’s certainly possible that TD (and others) might offer family plans and keep the investments in two separate accounts on their system even though it appears to be one “plan” to the client.

    Anyways, I can guarantee that somewhere in the application process you set up the allocations for the contributions, probably 50% to each child.

    Mike

  17. Canadian Capitalist

    Mike, I checked the family plan application on E*Trade and there is no place where you can specify attribution to each beneficiary. So, I guess this is how it works everywhere:

    1. In the family RESP application, name Kid A as 1st beneficiary and Kid B as 2nd beneficiary. In the CESG application, request grants in Kid A’s name.

    2. In the other family RESP application, name Kid B as 1st beneficiary, Kid A as 2nd and make a CESG grant application in Kid B’s name.

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  20. CC I have TD’s RESP family plan – just one account for both boys. They’re 2 years apart, so I had to build a little spreadsheet to keep their amounts separate.

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  25. How are you finding the convienience of the eFunds? I’m looking at the same solution for a low fee RESP. The TD Person I spoke to today said I could only make lump sum contributions in the branch via a Money Market Fund (this doesn’t sound very “e”). How does it work for monthly payments?
    Thanks
    Dave

  26. Hey Dave – I’ve had an e-series for a over a year now. It’s true you can only buy index funds from the Money Market within your RESP but they can link the money market to any bank account you want. I transfer money from a chequing account at another institution – money is usually there within 24 hours, then I buy my e-series index funds from that. The matching money from the government also gets deposited in that account for you to use as you wish. I’m assuming if you set up monthly transfers and then set up monthly purchases of the e-series maybe 48 hours later it would all be fine (and still be very “e”). The start-up of the RESP is still paper based though (but I found the TD person very helpful and she did most of it for me).
    Hope this helps,
    Bob

  27. If I make a withdrawal from my family plan for my daughter’s education, can I still contribute the following year for my son’s and receive the CESG? Both names are on the RESP.

  28. Hi everyone,

    My boys are now 12 and 14. What is a recommended RESP asset allocation for their ages? Example: If my boys were young, as per the posted article I would place their funds in 80% equities and 20% bonds (20% bonds, 20% Canadian equities, 30% US equities and 30% developed market equities).

    As they get older I’m assuming I should decrease the equities allocation and increase the bonds allocation. But….to what level?

    Thanks….Jason

  29. I just opened a Mutual funds RESP and planing to convert it to e-fund asap. I noticed that Money Market Fund (the default one) has MER AND management fee. I know it’s gonna be only a transition point, but money are still going to sit in it for some time. Can anyone who is using this scheme tell me what it cost in real $$ to have your money in it? Per day, per month? I mean, for instance, if for some reasons my contributions of $500 will be parked there for a week, how much do they charge and when?

    Thanks.

    • Canadian Capitalist

      @Irina: MER = Management fees + operating expenses. Management fees are charged daily on the assets of the fund. So, if the management fee is 1% and there are 365 days, the fund charges a fee of 1/365% everyday. These fees are charged directly to the asset base, not separately to the unit holder.

      Let’s say the MER of your fund is 1.5%. If you invest $500 for one week, you’ll be indirectly charged a fee of 1.5% / 365 * 7 * $500 = $0.14.

  30. Canadian Capitalist, thank you for the reply! It’s a bit more clear now, though it looks confusing in the “details” of the TD Canadian Money Market – I prospectus, that a bank rep. printed out for me:

    “Actual Fees:
    management – 0.75%
    MER – 0.61% ”

    I also wonder… if this fund was not just a transition point, but the actual destination of my investment, why would somebody invest in a fund that has charges of 1.36% per year and its return for the 2009 was 0.32%? Ether I’m missing something or it’s done for the hope of better return in the future…

    • Canadian Capitalist

      @Irina: The money market fund invests in short-term instruments. As you know, we are in a low interest rate environment with T-bills paying just 0.54%. After paying a 0.75% management fee, your return will be negative. But banks like to keep the value of the money market fund stable. So, money market funds have been temporarily reducing their management fees. That’s why you see the MER to be less than management fees. The total return of the fund before expenses in 2009 turned out to be 0.93% (0.61% + 0.32%). It sounds about right.

      Money market funds are places where you temporarily park cash. They are not long-term investments. Since they have very little risk, their returns are also very low.

  31. I guess, I’m stuck… My account is converted now to e-funds and I bought my first investment. I bought it well before the cut-off time, but the price appeared on my statement was published on their web site only on the next day. At the moment of purchase the price seems to be “as of yesterday”. So I’m basically buying a pig in a poke. Is there any way to know the price for the moment I’m making my purchase?