What are the best options for an RESP for my 2 year old kid?

Question

Just starting to look into RESPs for my kid. There are RESP funds, or I could just throw money in a GIC... wondering where else I should look... and what I can do.

Answer 1

Since your child is 2, he has a long time horizon for investment. Assuming the savings will be used at age 19, that's 17 years. So, I think your best bet is to invest primarily in equities (i.e. stock-based funds) and inside an RESP.

Why equities? Historically, equities have outperformed debt and cash over longer time periods. But, equities can be volatile in the short term. So, do purchase some fixed-income investments (e.g. 30% government bonds and money market funds), and do also spread your equity money around as well -- e.g. buy some international funds in addition to Canadian funds. Rebalance every year, and as your child gets closer to university age, start shifting some assets out of equities and into fixed-income, to reduce risk. You don't want the portfolio torpedoed by an economic crisis the year before the money is required!

Next, why inside an RESP?

• First, the Canadian government will kick in a 20% match on your first $2500 contributed each year, up to age 17, to a lifetime maximum of $7200. That $500/year, is called Canadian Education Savings Grant (CESG) and it adds up.
• Second, any investment earnings inside the RESP are sheltered from tax until withdrawn. Tax-sheltered compounded growth adds up.
• Third, qualified withdrawals made by your kid when they go to post-secondary education are taxed in their hands, not yours -- and generally that means a good chunk of it is withdrawn tax-free if there's no other income on your kid's tax return at the time.

Finally... what if your kid doesn't attend post-secondary education? First, you should probably get a Family RESP, not a Group RESP. Group RESPs have strict rules and may forfeit contributions if your kid doesn't attend. Have a look at Choosing the Right RESP and Canadian Capitalist's post The Pros and Cons of Group RESP Plans.

In a Family plan, if none of your kids end up attending post-secondary education, then you forfeit the government match money -- the feds get it back through a 20% surtax on withdrawals. But, you'll have the option of rolling over remaining funds into your RRSP, if you have room.