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.