Lump Sum RESP Contributions

March 22, 2007

1 comment

Rob Carrick discussed the implications of the removal of RESP contribution limits in a recent column in The Globe and Mail. Does it make sense to make a big contribution to the RESP even if you don’t get the 20% matching grant? While this is not an issue that most people will face, it poses an interesting question: Is the RESP an attractive option if all it offers is tax-sheltered growth without the benefit of a grant?

I don’t have the numbers to back it up but I think there might be far better options than contributing a lump sum to the RESP, such as investing in a taxable account in a tax-efficient manner or gifting the money to the child to invest (though income and dividends will be attributed back to you). Personally, we put just enough money into the RESP to get the maximum match and like most people, we also have other priorities that need funding like retirement accounts and a mortgage.

RESP Basics

November 9, 2006


Reader Alex left the following comment on how to get started with a RESP for his soon-to-arrive baby:

Do you have any RESP accounts that you recommend? Most I’ve seen charge an administration fee, and I’d like to avoid that.

I have set up a RESP for my boys with TD eFunds, which doesn’t charge an administration fee and offers some of the lowest-cost index mutual funds in Canada. There is a bit of a process involved in setting up the account initially but once it is taken care of, you can contribute every year with the click of a button. Three-to-four weeks after the contribution is made the Canada Education Savings Grant (CESG) is automatically deposited into the account.

I park the initial contribution and the CESG in a money market fund, which I then liquidate and buy four funds according to my asset allocation target (TD Canadian Bond Index eFund: 20%, TD Canadian Index eFund: 20%, TD US Index eFund: 35%, TD International Index eFund: 25%). The portfolio is rebalanced roughly once a year when new contributions are made. This simple portfolio has performed reasonably well gaining about 4.3% over the past nine months.

There are other options available for RESPs that are not very attractive in my opinion. Group RESP plans like the Canadian Scholarship Trust are inflexible, expensive (the heavy promotions to new parents comes out of the pockets of existing plan members) and are invested in low-growth fixed income assets. I also avoided a self-directed RESP because they typically charge an annual administration fee if a minimum balance is not maintained.

Related Post – RESP: Getting Started

RESP: Getting Started

March 12, 2006


Recently, I finished setting up RESPs for our boys and for new parents who cannot wait to start saving for their kids’ education, here are the steps to getting started:

  1. First a Statement of Live Birth form should be completed and filed with the city where the hospital is located.
  2. Three to four months later, a Notice of Birth Registration arrives in the mail.
  3. Using the information in the Notice of Birth, apply for a Birth Certificate from the provincial government. In Ontario, the Ministry of Government Services accepts online applications with guaranteed service times.
  4. With a birth certificate, apply for a Social Insurance Number for your child at a local Human Resources Development Canada office.
  5. I decided on a self-directed RESP and I think TD eFunds are perfect for such accounts. I first opened a TD Mutual funds RESP account, parked the initial contribution in a money market account and then converted it into an eFunds account.
  6. As soon as the eFunds account was open, I bought index funds to match my target asset allocation of 20% bonds, 20% Canadian equity, 35% US equity and 25% International equity.

See also:
MoneySense magazine’s excellent RESP article.
Frugal Canadian’s post on RESP basics.
Canada Revenue Agency’s RESP publication.