032: All About RESPs (Part 1) | Money in Your Tea and Modern FImily

On this episode, we’re taking a deep dive into RESPs with Kari from Money in Your Tea and Court from Modern FImily. In this first of two parts, we discuss RESP basics, grants, contributions, and investments. Get your notepads ready—we’re covering a lot of ground!

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Money Mechanic
Hello listeners. Welcome to Explore FI Canada, where we sit at the roundtable with Canadians, and share their thoughts, ideas and personal journeys to financial independence.

Money Mechanic
Here we are, again Explore FI Canada. Thanks for joining us in this episode. Chrissy is with me and I am the Money Mechanic. And we have a couple extra guests at the roundtable today, which is really exciting because this we’re going to discuss a topic that I am woefully inept to be able to share any expertise with our listeners. So we have Court from Modern FImily.

Court
Hey guys, thanks for having me on.

Money Mechanic
Yeah, great to have you here. And we have Kari from Money in Your Tea is her blog.

Kari
Thanks for inviting me.

Money Mechanic
Yeah, well, we really appreciate you coming on the show. We have you as the quote unquote expert. Although I think between Chrissy, Court and yourself you all have children, you all are fairly well versed in today’s topic which is going to be a deep dive starting off with the basics of RESPs, and then sort of getting down into the weeds and learning all we can about them. And one of the reasons we wanted you on the show, Kari is because you’ve got some great articles on your blog, which is Money in Your Tea. And you’ve written RESP Investing From Newborn to High School. And you’ve also written The Mystery of RESP Withdrawals Revealed. So it’s all new and good stuff to me. Chrissy, looking forward to doing this show.

Chrissy
Yes, I am so excited. Court was so nice. And she spent a lot of time putting together a huge list of questions for Kari and shown us that she knows quite a bit as well. So excited to talk to both of you and to help our listeners learn more about RESPs because there is actually quite a lot to know once you dig in. And there are some little tricks that if you pay attention, you can maximize your grants and make sure you benefit the most possible from your RESPs for for your children. So why don’t we start with Kari, how about you introduce yourself to our audience? Just a short little one minute intro to tell us who you are and what you do?

Kari
Sure. Well, my name is Kari. And my background is in economics. And I’ve worked off and on in economics over the years, I took a number of years off to be a stay at home, parent and homeschool my kids. And now I work part time for a couple of economics associations. And about a year ago, I started my blog Money in Your Tea. I was feeling like I needed to do something new now that my kids are getting a little bit older. And I’ve always liked personal finance. And I thought this would be a way of learning myself and also sharing my own experience with others.

Chrissy
That’s wonderful. And you’re especially qualified to speak about RESPs because you have four children. Yes, and at least one of the age where you are withdrawing from the RESP for her, is that correct?

Kari
That’s right. My eldest is just finished her second year of university. And my second is just finishing grade 12. So we’re just getting into this again starting to perfect him in the fall.

Chrissy
Great. Yeah, cuz Court you just have a little one, right?

Court
Yeah, just a little two year old. She just turned two in April. So got plenty of time, you know, for the RESP to grow, but always something so that you know, something that I’m interested in if it’s money related, I’m interested.

Chrissy
Yeah. And you’re planning way ahead, which is excellent. Yeah, we should we should start as soon as we can, with our RESP will get the most benefit that way. So how about we start off with the first question, I’ll let Money Mechanic take this one.

Money Mechanic
Alright, so we are talking about RESPs which for everybody, or maybe some of our listeners don’t know, that’s the Registered Education Savings Plan, I believe is the right acronym. Did I get that right? I hope so. Anyway, we’ll start off just with a little bit of basics. What is an RESP who should have one and who should not have one?

Kari
Well, as you say, it’s a Registered Education Savings Plan. So it’s a plan set up by the Government of Canada. It’s intended to help mostly parents, but other people can also open an RESP for children. So it could be grandparents, it could be a godparent. It could be aunts, and uncles, anybody who would like to help contribute to saving money for a specific child’s future education needs. And it’s the biggest help is that the government gives a grant of 25 or 20% matching what you put in, so if you put in $1,000, the government adds another $200 to it. So and that’s a big help right there. And so it would be great if all children could have one but absolutely kids from parents who are struggling with their own finances? Those families need to prioritize their own retirement savings or their children’s education savings.

Chrissy
Mm hmm. So this is something that I’ve heard repeated many times, not just in Canada but in the US that you should prioritize always prioritize your own retirement first, because you have far less time to save up the money. And your kids can take out student loans, you know, in the worst case scenario, and they have many years to work to pay those back so well. It’s ideal if we can all start RESPs early the priority should be people who are are needing a larger retirement nest egg. So we’ll move into the next question. Can you tell us Kari where can people open RESPs? Can you open it just anywhere? Or are there specific places you have to go?

Kari
Sure you can open an RESP account at a bank or an investment company, credit unions and trust company and those are probably the most common ones. There are also something called a group RESP. And if you’ve ever been to the new baby show or something like that at a convention center kind of thing, you’ve probably seen a lot of sales people trying to push these types of RESPs. And they work somewhat differently to the ones that banks and investment companies, because all of your money is pooled together with all of the money contributed for other children of that same age. And the growth is divvied up between those children as they reach post secondary.

Chrissy
So it sounds like maybe a convenient option. So what I’ve read also is that they’re, while they’re convenient, they can be quite expensive, and they’re also really restrictive and you may not be able to get your money out if you change your mind and don’t want to be in the pooled RESP anymore.

Kari
That’s right. There is a risk from what I’ve heard, I don’t have specific experience with group RESPs. myself, but I have read people who have not been able to make their monthly payments for one reason or another, you know, life happens, it gets them away, have a tough financial year, and you can’t make that payment one year. But sometimes, depending on the fine print of these groups RESPs. And you might lose your spot in that RESP and you’ve lost everything that you’ve deposited to that point or if you can get your money back, it’s less a lot of the fees that they charge and you lose out on all the growth as well. So I’m not really a fan of them myself.

Chrissy
I’m not either… yeah, I’m not either, and I just want to mention an article that Gen Y Money wrote about these recently, and you should give it a read and I think you’ll be pretty convinced to stay away from these. I think the downsides far, far outweigh any of the benefits.

Kari
I mean, they do take care of the investing decisions for you. But it may not be what you want to invest in anyways, it might be too conservative for your own taste or not conservative enough. And again, what you would prefer to do and you can also go to an investment company or a bank and get quite valid advice there if you’re not sure what to do.

Chrissy
Yeah, so for those who are on the FI path, most likely, you’ll be happiest going with something someone like Questrade, or a bank that offers a discount brokerage and just using maybe a one fund ETF and investing it that way. But, of course, we’re not giving investment advice here. So suit yourself. Most likely you want to stay away from these group RESPs. And I’ll let Court have the next question.

Kari
Just before we go ahead, I just wanted to mention that within an RESP you can invest in all different types of things. So it’s quite like an RRSP that way So you can have it in a savings account, a high interest savings account, mutual funds, stocks, ETFs, bonds, bond fund, all kinds of different assets within that classification. And that can change as your investing goals change over your child’s age, because obviously, you probably want to be more risky when they’re young, and they’ve got years to recover if there’s a stock market crash, and rather than risking that money when they’re in grade 11, or 12, when you haven’t got that time on your side anymore,

Chrissy
Those are all good points.

Court
Yeah, good point Kari. The easiest way to think about it. It’s just another account just like an RRSP or TFSA, like you say, Kari. So I think, you know, I want listeners to understand that it’s just a warehouse of where you’re going to put these funds and then what you decide to allocate within that account is up to you, right, whether you’re DIY more, you know, in a Questrade type of thing, or if you want to go into more of like a trust or a group RESP that’s your decision but if you want full control, you know, the best way to go about it is is to go that DIY route which most of us in the FI community tend to be, and then you can pick how you want to allocate those funds.

Kari
That’s right.

Money Mechanic
I have a quick question before we move on from this section is, Are you allowed to have more than one RESP account open per child? I gather, you wouldn’t obviously get the grant money. But could you have two separate investment accounts going for them?

Kari
Yes, you can. So if the parents want to open an account, and then the grandparents want to open an account as well, you can do that. But you are just restricted to that same amount of grants each year. You can’t get double the grant because you’ve got the only account, unfortunately.

Chrissy
Yeah, we’re in the position where we have to RESPs because there as it grant in BC, the BC Training and Education Savings Grant, I believe it’s called it’s it’s specific to the RESP but it’s only for kids of a certain, born in certain years. And because only my younger son qualifies for it. We had to open a separate individual RESP for him just to hold that at a separate institution. So yeah.

Money Mechanic
Interesting. All right Court why don’t you move on with the next one?

Court
Okay, so this kind of goes along with what we were just talking about. So what is the max contribution that the subscriber can contribute over the lifetime and what government grants are available?

Kari
So you can contribute up to $50,000 during the lifetime of the RESP, but the government will only do the 20% grant on up to a $500 grant per year. So if you’re maximizing up to the grant only that would be contributing $2,500 each year to get that $500 grant and the grant maximum is $7,200. So that would be $36,000 of parent contributions to maximize that grant.

Court
So this is like huge. This is the biggest benefit of the RESP is the fact that the government is essentially giving you a 20% boost in your portfolio immediately, right? Like you put in the $500. And next thing you know, within a week or two, or however long it takes to process, you have another $500 to invest as well. So, you know, anyone listening with kids like, this is why this investment account is so important. Like where else can you get a guaranteed 20% return from the get-go. Literally nowhere, right? So that’s the big takeaway of this account, right?

Chrissy
It’s free money.

Court
Yeah.

Money Mechanic
Well, definitely one of the reasons why you want to get started as early as possible for sure to take advantage of that. So this, maybe you can sort of let listeners know when this program started. And how have the grants and contribution limits changed over the years?

Kari
The RESP as we know it started in 1998. At that time, you could contribute $2,000 per year and get the 20% match of 400. And then in about 2007, they increased those limits to $2,500 per year with the 20% grant of $500. So it hasn’t changed a whole lot over that 22 years

Chrissy
No! It hasn’t kept up with inflation.

Kari
No, and especially post secondary inflation is even higher than regular inflation. So, I just read in the paper today, an estimate that for children born this year, the cost of post secondary could be $100,000. So I think that the government really needs to have a look at this and start increasing the amount that parents are allowed to contribute the maximum amount parents are allowed to contribute and the maximum grant that they’ll match too because you just can’t save $100,000 in this program. The way it’s currently set up, unless you’re very lucky in investing in something risky.

Chrissy
Mm hmm. So also another thing to note is that that lifetime benefit has remained at the $7,200 total from the government. Right? So that hasn’t changed at all since 1998.

Kari
That’s right.

Chrissy
One thing I would like to point out too is, if you receive the CESG, which is the basic grant that everyone receives when they contribute, you may also qualify for something called the Additional CESG. And my husband and I, we qualified for this in the early years, because we were lower income, we were on one income and he wasn’t earning very much in the early years when our first son was born. And I didn’t realize is that it adds on to your maximum lifetime grant total of $7,200. And so what happened is my older son he, he maxed out his grants earlier than I anticipated and so I kept contributing for a few more months until I realized oops, I’m not getting any more grants. And it wasn’t until then I realized that so if, if anyone is receiving the Additional CESG just keep that in mind. And also know that there is another grant that you could qualify to receive. Do you want to talk about that one Kari?

Kari
Oh, sorry. Do you mean for lower income families?

Chrissy
Yeah, the Canada learning bond.

Kari
Yeah, I’m, I’m not terribly familiar with that from personal experience. But if you are contributing to your RESP, and your income is below, somewhere around $45,000, I think they will give a slightly higher grant from the government.

Chrissy
Mm hmm. Yeah. And I think that the Canada Learning Bond is actually a separate maximum, which is possibly nice for those who are in the fire community and they are able to retire early and they live on very little they could very easily qualify for the additional CESG as well as the Canada Learning Bond.

Kari
Yes, that’s true.

Money Mechanic
I’m just filling in the blanks for myself here. I gather that the acronym CESG stands for Canada Education Savings Grant.

Kari
Yes. Sorry. Thank you.

Money Mechanic
I noticed like when I hear acronyms on podcast and like, I guess I’m gonna have to go look that one.

Chrissy
Yes, that’s correct.

Money Mechanic
Okay. Right on. Court, go ahead. You got another comment?

Court
Yeah, um, just some more info on the Canada Learning Bond. So essentially, what is it is it’s an initial $500 that’s offered by the Government of Canada, which can help you start saving, you know, now, like when your child’s newborn whenever you do start your RESP, and then every year, you could be able to get an additional hundred dollars until the child’s 15. So, in total, I believe your child can read receive up to $2,000 in additional funds through the Canada Learning Bond in addition to the grants that we talked about before that $7,200 other grant. So that’s kind of the benefit to being in a lower income situation. And like Chrissy said, depending on when you FIRE and leave your job, your income might bring you down below that $46,000 threshold and boom, now you have 100 extra dollars that you can contribute or get as a grant, excuse me, and then invest with so nice job Chrissy bringing that.

Chrissy
You’re welcome. I do want to mention one more thing. I’m not sure. I believe that you have to separately apply for these things, these additional grants or the learning bond. And I don’t think they’re retroactive meaning like you can’t catch them up if you haven’t applied in earlier. So it’s best to look into all these things as early as possible, because you’ll get the maximum benefit that way and you won’t miss out on anything.

Court
Right? Yeah, I think there’s only like a leeway of like a one year catch up. So if you started at age 10, get it for one previous year. But yeah, so Kari what’s the maximum age that you can contribute into an RDSP.

Kari
So most people are parents starting the RESP when their child is little, and then kids graduate from high school and go into post secondary either right away or in the first couple of years of finishing high school, but you can actually contribute into an RESP for 31 years for when it’s first opened. And then you have another five years after that before you have to wind it down. So you have quite a long time to contribute into an RESP. And you can even open one as an adult for yourself if you plan to go back to school in the future, but you’re not eligible for that Canada Education Savings Grant that only goes up for children aged 17 and under.

Court
The max limit that you can contribute into an RESP is $50,000. Is that correct?

Kari
Yes, that’s right.

Court
I just wanted to go into just a couple little numbers since I’m a numbers nerd for any listeners here so I essentially you in order to get this max $7,200 from the government, the idea is you want to contribute $2,500 a year, in theory ages one to 14 for a total of $7,000 from the government that’s $500 a year for those first 14 years, and then another $1,000 in the following year, year 15, to get that remaining $200 of the CESG benefit, or some variation like that before that 18 year limit comes in where you can’t get that CESG benefit anymore. So if you do the strategy, are you putting in a total of $36,000 on your of your own, and in theory, you assume 7% growth over those first 14 years. And then if you switch to a more conservative 3% growth towards the ends at age 18, you can estimate that your child will have about $76,000 to put towards their education. Another scenario is if you contribute just a straight shot $2,500 a year for all 18 years means you’d be contributing $45,000. So you’re still not quite at the max, you still have room for another 5000 if you want, but you with assuming those same assumptions, the 7% growth over 14 years, and then 3% growth years 15 to 18, you’d have about 80, $88,000 in the portfolio. So just wanted to run some numbers there. And just to note that when I say year one, that’s the year baby’s born. So really age zero, year two would be the year they turned one, you can contribute starting January 1 of that year, essentially.

Kari
That’s right. And in fact, you can if you want put that extra $14,000 I mean, extra, quote, unquote, in in the very first year, if you want to, you’ll only get the grant on $2,500. But then you’ve got it earning income over the 18 year period until they finish high school. So you might be able to increase the value of your total portfolio but that’s assuming you happen to have extra, sitting around, as well as having a newborn.

Chrissy
Yeah, that’s true. And also, I guess, this kind of a gamble. Because if your RESP is too big, I know that you can get your own contributions out. But it, it may be more money that you have to figure out how to shift out of it later if you don’t need all of it.

Court
It’s a good problem to have, though.

Chrissy
Yeah, it is.

Money Mechanic
Quick question here. When I open a RESP account, do I just go to my financial institution or online and I may be jumping ahead in the episode a bit here. But do I need to also fill out paperwork with the government? Or is it just sort of like me opening up an RRSP account at my bank?

Kari
Yes, it’s similar to opening an RRSP. So you go to your bank or your whatever financial institution, investment company, and you fill it out. Your child needs to have a social insurance number and so do you. But that’s really the only requirement.

Money Mechanic
Okay. That’s good to know, it’s just something that I was didn’t want to forget. And I guess we can move on to the schooling now and what choices that your child or maybe perhaps the parents make for, for school down the road? Does your child have to go to school in Canada?

Kari
No, they don’t.

Money Mechanic
Interesting. Okay.

Kari
It’s very flexible.

Chrissy
And can it be anywhere in the world? And are there specific institutions that qualify?

Kari
The Canadian Government has a long list of institutions on their website. And in Canada, that would be universities, colleges, but also trade schools, apprenticeship programs, CEGEPs in Quebec, and pretty much anything where there’s a learning component after high school.

Chrissy
It’s fantastic. We’re pretty lucky that they’re that flexible. Yeah. Another question we wanted to ask you then, this is always huge on a lot of people’s minds. What happens if your child does not go to post secondary? What do you do if that’s the situation?

Kari
Well, you have 35 years to decide. So it could be that they’re 18. And they don’t know what they want to do with their life. It is a big decision, and it’s an expensive decision. So you don’t want to get that wrong. And and so maybe they decide to work for a couple of years or, you know, when it’s not Coronavirus time maybe they would travel the world. But and so you just hold on to that for a few years and maybe they decide to go back to post secondary learning at some point down the road and then they use it then if they get too into their 30s and they’re like, I’m never going to use this. Then the government will take their $7,200 back and the amount that you put in as the parents or the subscriber with your parents or grandparents or whatever comes back to you. And the growth then becomes taxable, and there’s a 20% penalty on that. So you do get some of it back. But if you have room in your RRSP, you can roll it over into that without penalties. So that’s another option.

Court
So were you Kari, were you ever worried your RESP would not be utilized for what they were intended for? And you’d have to figure out, Okay, what do I do with this money now? Was that ever something you were worried about over the years?

Kari
No, we never really worried about that. I mean, it’s so wide open as to what your child can go to in terms of post secondary learning that I would be surprised if most young adults don’t go to at least one of them within what before they turn 35. So, and even in the worst case scenario, then, you know, we can always roll it into the RRSP or you can also roll it over to other children if you have other kids who post secondary as long as they haven’t maxed out their contribution room.

Court
Yeah, I agree with you. I think a lot of people get hung up on the whole 20% penalty. They just hear that they’re like, Oh, no, no, no, I’m not going to invest in an RESP. I’ll find another better alternative out there. But, I mean, I think people get hung up on that portion of it way too much. because like you said, you have 36 years for your kids to figure life out if they don’t go to school right away, right after high school, you know, they still have almost, you know, years to figure that out. And if they haven’t, you know, and they decide school isn’t for them. The grants are the only thing that would be lost, which was free money anyways. So you know, it’s really nothing out of your pocket, your contributions would be returned to you free and clear, tax free since this was still contributed with after tax dollars, all of your contributions, so that’s money, you’re just going to be handed back. And then it’s only the earned income from the investments that is subject to that 20% penalty. And what I how I like to think of it is that that, you know, like you said also that you if you have the RRSP room, you can contribute it up, I think you can contribute up to $50,000 into your RRSP penalty free. So if you have that room there, that’s one option. And really, like, it’s a good problem to have, right? Because, like for us, you know, we’re not counting any of our RESP money into our FIRE calcs we view this as money towards our children and how they decide to go in terms of education is there so really like this money would simply be gifted to our kid so that they can start their entrepreneurship endeavors or go travel around the world or, you know, whatever it is they wanted to do instead of some form formal schooling. So I think it just provides you and your children with that optionality that if they don’t feel like schooling is for them within those first 35, 36 years, then, okay, this money can be utilized in other ways. It’s just deciding where it’s going to go instead.

Chrissy
Mm hmm. I love that you bring that up Court because it is a big chunk of the worry with RESPs and you’re right. That people I think stress over it a little too much. And we do have to look at really how we can withdraw it. And it’s not actually as restrictive as people assume it is.

Court
So it strikes me that there’s really no downside to these accounts. If you can come up with a contribution room, and you can get that 20% from the government, you’ve got 35 years to figure it out. Would have been a fantastic problem for me to have when I was 35, have some money sitting in there and maybe go back to school for something. So that’s really interesting. Now, I asked a little bit earlier about how many accounts you can have per child and things like that. Are there differences between individual and family accounts? And are there pros and cons of using the two?

Kari
There are some. The biggest difference is that with a family account, you can name more than one child on it. So if you have two children or three children or four children, you can have them all within one account. An individual account is as its name would imply, per one person. So if preferred, you could have an individual account for each of your children rather than having all of your kids in one family account. There are also some other minor differences. Like, if you were the favorite single auntie and you wanted to contribute to your niece and nephew’s education, you would have to take out an individual account for each of them because you’re not a parent or grandparent. But those are sort of like minor differences around the edges. But the accounts themselves work the same way.

Money Mechanic
So it sounds to me like, if you had children that were very close in age, it may make your life a little easier to have a family account. Whereas if your children are spread apart in age, you might want individuals. Just from from me looking at that from the outside going, I may want to manage the investment differently in the accounts.

Kari
Yeah, we have one account for each of our children rather than a family account for all of them because there’s a nine year age spread. I mean, not that we knew that when we had our first child because you don’t know how many kids you’re gonna have. And what the spreads are going to be. But that’s how it turned out and just trying to wrap your head around at this point, I mean, my youngest is in grade five. So our investment strategy for her is that she’s still got, like at least eight years to invest before, we have to take that out. So it’s fairly aggressive, whereas my eldest is in university and my second eldest is starting post secondary this fall. So you’re very conservatively invested for them. And trying to do that all within one account just seems like mind boggling to me. But if that works better for you to have that all together, but when you contribute, you do have to say you’re contributing this much to this child. So it’s kind of earmarked for one child or the other within that family account.

Chrissy
Yeah, you do have to be specific with your brokerage, who you are contributing to otherwise, they’ll just assume and split it 50/50 and sometimes that’s not what you want.

Kari
Mm hmm.

Chrissy
So, Kari, if you were to decide that you wanted to switch from individual accounts into a family RESP for instance, a family might want to do this if they had one child to start, and then they have a second or more children and they want to convert to family RESP is that a difficult process?

Kari
You can actually open a family RESP even with one child. And if you never have a second child, that’s fine. You can still stay as a family RESP with just one beneficiary. But if you want to switch down the road, you just have to make sure you make any changes through the bank. You don’t want to be withdrawing your money in cash and walking across the street and then depositing it somewhere else. It’s just like an RRSP. You want to switch institutions? You have to get the institution to do it.

Chrissy
Okay, okay. So it’s not it’s not a huge nightmare. You can do it quite easily as long as your institution handles it.

Kari
Yeah. We recently switched institutions and it was a long drawn out process. Slightly painful. But yeah, it happens.

Money Mechanic
They’re pretty reluctant to let that money go, aren’t they when you want to try and change institutions?

Kari
Oh, yeah.

Court
So Chrissy, Kari’s mentioned that she has individual accounts for her four kids. I know you have two kids, how do you have your RESP set up? Are yours individuals for both of them? Or do you have yours under a family account?

Chrissy
Ours was a family account, because for me the benefit of being able to shift money from one to the other. I mean, you can’t shift the grants but all the other money, the gains and our contributions can be then allocated to either child. For me that gave me some peace of mind to know it was more flexible that way. But I can also see in Kari’s situation and others that I’ve spoken to where when you have quite a large spread in the age of the kids that would be too much of a headache to manage as far as investments and keeping track of everything so I can see the benefits of both but my kids are about two and a half years apart and so it made sense for us to have a family account.


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Money Mechanic
All right, so we’ve kind of started discussing a little bit about the investments and things you can hold and Kari, you have a good little graph on your blog here, the one that we mentioned at the beginning of the show, which is RESP Investing from Newborn to High School. And as we know, being DIY investors, and many of our listeners who are probably doing some form of DIY investing, as well, that you’re going to have some different risk tolerance, depending on the age of your child. And that’s going to impact what you choose as far as investments go. So we’ll talk a little bit about contributions and investments in this section of the show. And I just want to ask you, Kari, what has your contribution strategy been? How much do you as a subscriber contribute per year per child?

Kari
So we try to get the maximum grant of course, because who turns down free money? But, you know, during that time, there have been years that money was tight for one reason or another, you know, I mean, my third child was born and the eldest wasn’t even five yet, I was gone from working part time to being a stay at home parent and we bought a new house. So, you know, there were some expensive years where we didn’t manage to make all of our contributions that year, but you can catch up on one extra year’s worth of contribution down the road. So if you miss, say, two years, you can double up for each of the next two years to catch up on what you missed, and they will match that grant. I don’t know if that was exactly your question, though.

Money Mechanic
Yeah, no, that’s that’s really good to know is is that having that one year that you can catch up on to get in there? So it sounds to me like what you’re saying is that there is some flexibility here, whether you’re making it a lump sum, whether you’re making it a monthly payment, or like you said, life happens and you miss, you don’t max one year, then you can top up so this is really good to understand that these options are available. That’s pretty flexible.

Kari
Yeah, it’s a very flexible program. Now as far as what we invest in, which I think was what you’re actually asking me, and definitely in the early years, we were much more invested in stocks. We started opening our accounts at banks, and they of course have mutual funds rather than ETFs. But our oldest was born in the year 2000. And so DIY investing in ETFs wasn’t the thing in 2000, that it is now. And so as our understanding of investing grew and changed over the years and ETFs became much more popular. And we moved those accounts into a self directed investment company so, so now we’re in ETFs. But the idea is still the same that when the kids are younger, we have a lot more in stocks, and that’s Canadian stocks as well as US and international stocks. And then as they get older have more bonds. And then GICs, guaranteed investment certificates. Because bonds themselves also go up and down, although not typically as much as stocks. And, you know, with the just look at what the markets have done earlier this year, if I had to go to my 17 year old and say sorry, honey, you can’t go to college next year because your RESP just dropped by 30%. I don’t think you’d be very happy with that. So as they get through high school, you want to really start locking in those gains, at least that’s how I feel about it that for us, we wanted to lock in those gains and be satisfied with having enough rather than having the most we could have.

Chrissy
So you’re mentioning Kari that your asset allocation, you shift as your kids age and then you’re going have more heavily into bonds as they get closer to needing the money

Kari
And GICs as well.

Chrissy
GICs, okay. Yes, of course because the GIC ladder is extra safe and a lot easier to access. So I want to ask Court now, what is your planned asset allocation as your as your daughter Finn ages and any other future children?

Court
Yes, our thought is the plan right now I’m thinking of keeping individual accounts and thinking it. This is your money Finn and then this is your money baby two, if we ended up having baby two and whatever it ends up being it ends up being at the end. That’s just my thought right now. Now, of course, Finn’s only two and we only have one kid at this point. So who knows how things will shuffle and change in terms of contributions we’re putting in our plan is to put $2,500 a year over the course of 18 years. So we’ll put in $45,000, potentially more. I haven’t decided yet if we want to do more than that to get to the full 50. But I kind of like that $2,500 number. So that way we get to that full government match that we can get annually and then just continue above and beyond that. And then in terms of how we’re investing. We have our setup with Questrade we’re DIY Questrade lovers and right now we’re 100% in stocks, in particular, VUN, which is essentially the Canadian equivalent of VTSAX that tracks the overall US market. So while there’s, you know, there’s over 3,000 funds in there, it’s only us base so a lot of people listening may not think I’m diversified enough. But that’s the fund of choice for us at this point. And for now, my thought is to keep it there for at least the first 14 or 15 years, see how the portfolio has grown, and then possibly adjust into more bonds and more GICs at that point, or just continue to let it ride. We’ll just see how things are shaping up where tuition costs are where the portfolio is at. If our daughter has any idea at that point, if she wants to go to school or delay it for a year or two, which means we can let it grow in in stocks and equities for a longer period of time, things like that and, and kind of just make it a bit more fluid than a set schedule. type of But yeah, that’s that’s kind of our thoughts for now. How about you, Chrissy, I know you’ve got two kids that are approaching, you know, almost University. So what’s your thoughts on all this?

Chrissy
Yeah, so I often have a slightly contrarian way of handling it. And partly it’s because I work with Ed Rempel, who is known for his unconventional wisdom. And so, I originally before I met Ed and start working with him was following the Canadian Couch Potato advice of as Kari has done, gradually moving towards GICs or bonds as the kids get older just to ensure that the money is is safe, and it’s gonna be there when the kids need it. But since we started working with Ed, he did a full financial plan for us and he determined that even two years ago, we already had more than enough to pay for both boys’ education for full four year university education at in 2018. And so he figured that if we continue contributing the way that we were and the growth kept snowballing the way it was that we would have more than enough. And so he said, just keep it 100% equities. And that’s just what our whole portfolio is. And it’s a simpler way. And for us, it’s aggressive for most people. But for us, that’s, it just works for us. That’s how we invest and we’re comfortable with that. And so that’s what adds advise. And that’s what we’re going with and it’s not right for most people. But…

Court
One thing to note with that Chrissy is you’re not withdrawing all the money as the year that your child’s in school, right. So I think that’s also important to realize is even if there is a dip while they’re in high school or approaching University, you know, some of the contributions that you’re taking out will be impacted, but you’re not withdrawing all of it from the get go. You’re only paying as you go, right?

Chrissy
Absolutely.

Kari
But it is a very short timeframe. I mean, the average a typical university to program is four years, and college programs are two years or three years. So it’s not like retirement where you retire at 65. And then you live till 85 or 90. So you’re gonna go through at least two business cycles, even during your own retirement. Post Secondary is a very, very compressed period of time.

Court
Yeah, good point.

Chrissy
Yeah. So I, I think it’s, if I didn’t have an advisor, guiding us along the way, I don’t know if I would take this approach, because we have an expert guiding us I feel comfortable with it. But again, I, if it was not for Ed, I probably would have just followed the Canadian Couch Potato guide where he I think it’s approximately 5 or 10%, that you decrease it by your equity allocation, starting from around age 11 or 12. I think so. That, to me sounds like a very reasonable and comfortable way to sort of scale down the RESP volatility as you get closer to post secondary.

Kari
And that’s the personal part of personal finances. You have to make the decisions that can you can sleep with at night? If so if you’re comfortable with all equity, then that’s what you do. And if you’re not, and you make different choices.

Court
So Kari, a question regarding your investment strategy, since you have four kids, has the strategy been the same for all four children? And if so, has their portfolio balances varied widely? And what I mean by that, like if you’re looking at the balance at the same age for each kid, so say, kid one and kid two at age three and age five and age 10, have you noticed that their balances have been relatively the same? Or have you noticed quite variation since they started investing at different ages or different dates depending on when they were born?

Kari
Yeah, we have similar investment strategy for all four kids. It’s not locked in stone where you know, their 12th birthday, I suddenly go and sell a bunch of equity or whatever is it’s not that rigid, but just the concept of being internationally diversified in mainly equity when they’re young, and then getting more conservative as they head into sort of middle school and then High School has been similar I will be similar for the younger kids. And yes, absolutely, their portfolios have been quite different at similar ages, because we started my eldest was born in 2000. And then next in 2002. And, and then my third was born in 2005. And then 2008 happened and the markets crashed. And, of course, we had a lot more invested for the eight year old than we did for the three year old. So. So that impacted her more, but then that’s kind of what we would expect to happen is that they would have different amounts and there’s no real good answer for how to make that fair amongst your kids. If you end up with one child who has an extra say $10,000 because the markets just happened to be better when you invested for that child. Because if you haven’t maximized your contributions to your other kids, you can’t reallocate to them. But if you’ve maximized your contributions for all kids, then you can’t really formally do that within the plan. So but then the cost for post secondary will also be different for kids as time goes on. So if they end up with more money, it might actually just cost them more to go to school.

Court
Right. And worst case scenario, they end up having to take out some loans, and it just motivates them to pay that back. Like, gives them more reason and more reason to hustle early on, right? If they do have some loans, like I don’t see if they end up if your RSP takes a dip and you can’t contribute 100% like I don’t view that as a failure. Like I had $65,000 in student loans to my name, which I know is unheard of for most Canadians because I went to school in the States but that’s ultimately what made me start my journey here is just wanting to kill off that debt. So I mean, like you said, there’s variations and you can’t beat yourself up over, you know what the market does and doesn’t do over the time.

Kari
Yeah, I mean, if only we all had a crystal ball to know when to get out of equities and put it all cash and then when to get back in the game.

Court
Yeah.

Money Mechanic
We’ve talked a little bit about asset allocation within there. And we could get a little into the weeds here for a lot of people that are new to DIY, but I understand how you’ve talked about having high equities at the beginning and then moving towards safer gic or cash savings towards the end. So what’s the cost to reallocate that within these accounts and rebalance every year? How do you do that? And what are the costs?

Kari
It depends on the plan. So I when we were with the bank and investing in mutual funds, there was no cost to buy and sell mutual funds. And to switch from one thing into another. Now that we’re DIY, DIY investing, the plan that we have is $9.95 per trade. So that’s what it is. If we sell some of our ETFs and buy something else, but buying a GIC has no cost to it or selling GICs.

Money Mechanic
Right You just need to be aware of the mature maturation dates if you’re gonna need that cash. Okay that’s interesting so it sounds to me like it it operates very similar to any other kind of do yourself type investment whether that’s a robo advisor Quest Questrade or whatnot.

Kari
Actually one thing that I should mention within the RESP even if you’re in a locked-in GIC, the student can still withdraw money from that to go towards paying for their post secondary education. So it’s completely non intuitive because you think locked in is locked in you know, that’s the point of it being locked in is that you can’t access it, but they actually can.

Money Mechanic
That’s very interesting.

Kari
Mm hmm.

Court
So when you get a grant money from the government, can you walk us through the processing of that? Do you get a check in the mail for that CESG portion, or does it go straight into your portfolio? Does it go into your portfolio as cash? Or does it get distributed as whatever you’re investing? Can you just walk us through, you know how it goes from CESG grant in theory to actually in your portfolio and growing and investing in there?

Kari
Sure, it goes directly into your RESP account. And, and, and so yeah, there’s no check or anything goes directly to the bank or the investment company or wherever you have that fund. And if it’s in a mutual fund, it gets automatically account allocated into the same proportion that you’re currently invested in. If it’s DIY investing, then it comes in as cash and then you make that decision on your own. Like any good DIY investor to how you would like to invest that grant money.

Court
Okay, great. I just wanted to stress to listeners, you know, if you’re going the DIY route, it is going to go into your account but as cash, so then you need to take that next step and choose which fund you want that cash to go into, or else it’s just going to sit in cash until you notice it months or years down the road. So just realize there’s one more action step of getting it and converting it from cash to whatever your fund of choices if you’re going the DIY route.

Money Mechanic
Considering we’re already 45 minutes into this deep and interesting topic, we decided to make this a two-part episode, so that you the listener, have a chance to digest all this information that’s coming at you. We covered the basics, some contribution information and got into some investing on this episode. Look forward to the next episode, Part Two, where we get into the withdrawal strategies and how to use your RESP when your children start post secondary education. Thanks again to our guests, Kari and Court for joining us on this episode, and we look forward to having them again with us on Part Two

Transcribed by Otter.ai

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