RESP Kitchener Investing from Newborn to High School

Investing from Newborn to High School

If you’re Canadian, you’ll recognize that RESP Kitchener stands for Registered Education Savings Fund. If you’re reading from another country, the discussion below applies just as much to your own registered or non-registered savings for your children’s college or university education.

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What is an RESP Kitchener?

The Registered Education Savings Plan (RESP) is a government program designed to help families save for children’s post-secondary education costs.

The RESP Kitchener program has two great benefits:

When you contribute funds to an RESP Kitchener, the Canadian government will grant you 20% of your contribution. If you transfer $1,000 to your child’s RESP, you get a $200 grant for free! There is typically a maximum grant of $500 per year up to a lifetime maximum of $7,200 per child, but some families are eligible for more.

Investments grow tax-free while in the RESP. Withdrawals of grants and income from the RESP are taxed at the student’s marginal income tax rate, which is usually much lower than the parent's marginal tax rates.

There are limits and rules about RESPs that you can read on the Government of Canada’s website.

Investing versus Savings

You can do any combination of savings and invest in your education fund. This can – and should – change as your children get older.

RESP Savings

Savings do not have any risk of losing money. You deposit funds, and in the future, you have at least that amount to take out again. Savings typically have very low rates of return, because they are zero risk. You can save in a regular bank account, a high-interest savings account, or a GIC (guaranteed investment certificate).

RESP Kitchener Investing

Investing does carry a risk of losing money. You buy an investment product and hope that it increases in value. But sometimes it does not, and in the end, you have less money than you started with. To compensate investors for taking that risk, on average investments have higher returns than savings.

Examples of financial investments are bond funds, stocks, mutual funds (groups of stocks or bonds that are highly managed), and exchange-traded funds or ETFs (groups of stocks or bonds that are NOT highly managed).

What do we have in our Education Funds?

We chose mutual funds that tracked the stock market index, and had – for mutual funds – low management expense ratios. Our education fund portfolios includes the following mutual funds:

BMO Canadian equity ETF fund

BMO U.S. equity ETF fund

BMO international equity ETF fund

BMO bond fund

Canada is a small-ish country in terms of its stock market, and it’s important to diversify across countries, which we do with the U.S. and international equity funds.

The Role of Stocks, Bonds, and GICs

We chose to invest in a general bond fund as a hedge against stock market volatility and have a more balanced portfolio. Returns with bonds tend to be less than in stocks. You miss out on some of the highs, but don’t suffer as deep lows in market downturns. This is a personal preference, and you could choose to be as high as 100% stocks in the early years.

Line graph of RESP investing showing a Canadian equity fund and Canadian bond fund, by moneyinyourtea.com

This graph shows the ups and downs of a Canadian equity ETF fund versus a Canadian bond fund. The bond fund is fairly steady over many years, consistently paying out income which is reinvested every month. In contrast, the equity fund experienced incredible gains but also huge losses. Investing in a mix of equity and bonds can act as a buffer during bad times.

GICs, or guaranteed investment certificates, are a savings option, not an investment. The difference is that your money in a GIC is guaranteed. When you purchase a GIC, you know upfront the interest rate you will receive. There are no ups and downs, like the stock market.

As you get closer to needing those education savings, it’s important to lock in the gains you’ve made over the years. Imagine a stock market crash of 20% the year before your child graduates high school! If your retirement fund took a hit like that, you could probably choose to work a couple of extra years while the market recovered. But you can’t tell an 18-year-old to stay in high school for a few more years!

Why is this important?

While it is possible to set up a single “family” RESP for all your children, we have opted to set up a separate RESP Kitchener for each child. I find this more straightforward when making investing and savings decisions, as they are at such different stages!

The Takeaway

When investing for your child’s education fund, their age is the most important factor in deciding how to invest. Post-secondary typically starts the year they turn 18.

If your child is in grade 6 and under, you have many years left for the stock market to rebound if it crashes. Feel free to invest in as much equity as you are comfortable with. Bond funds are a good choice to pair with equity funds as a buffer.

If your child is in grades 7-8, start moving to GICs or other secure forms of savings. At this point, if the market took a dive, you still have time to make back some losses. But you want to lock in some of the gains you’ve earned so far.

If your child is in high school, you have little to no time left to make back losses from a stock market downturn. Plan on being 100% in GICs or other secure savings by grade 11.