Here’s a quick look at how your RESP investing strategy should change over time:
| Young child under 10 | Child to age 15 | Older child age 16+ | |
|---|---|---|---|
| RESP goal | Start contributing and prioritize growth | Balance growth and risk | Transition to a conservative investment strategy |
| Focus areas | * Open an RESP even if you can’t make the maximum contribution for the year* Get in the habit of regularly contributing to the account | * Continue making contributions, with the goal of hitting the annual maximum* Evaluate your RESP and rebalance the funds to start shifting away from risky investments | * Gradually reduce risky investments to favour stable investment options* Develop an RESP withdrawal plan with the beneficiary |
| Mindset | Start contributing to take advantage of tax-deferred growth | Optimize your contributions rather than simply contributing to the account | Protect the account as the withdrawal date approaches |
Ages 0 to 9: Focus on growth
Your biggest asset with an RESP is the time the funds have to grow tax-deferred, so the earlier you start investing, the better. This is largely because the RESP has more time to recover from market ups and downs. It also means that your investments have greater potential for long-term returns.
If market volatility causes short-term fluctuations, the account has plenty of time to recover before your beneficiary needs to withdraw the funds. In the meantime, keep making your regular contributions, so you can receive government grants.
MoneySense Tip
With the Canada Education Savings Grant (CESG), the government matches 20% of your annual contributions, up to $500 per year. To get the annual maximum government match, you’ll need to contribute $2,500 in a given year.
Ages 10 to 15: Balance growth with stability
By the time your child enters their pre-teen/teenage years, you’ll want to check the RESP investment types. Instead of overhauling the account, gradually start shifting investments from potentially risky stocks to bonds and GICs.
If you’re not particularly investment-savvy, you don’t have to manage this shift yourself. Working with an expert RESP provider like Embark means this glide path investment strategy is built directly into the plan. As your child ages into their middle and late teen years, your investments are automatically transitioned from high-growth to balanced allocations taking the guesswork out of timing the market and helping maximize returns by the time they’re ready to withdraw.
Ages 16+: Protect your savings
As your child gets closer to withdrawing the funds for tuition payments, it’s critical that you don’t lose funds because of a market downturn. Continue to shift the portfolio to lower-risk investments to protect the RESP from volatility.
This is also the time to begin planning withdrawals; you’ll need to decide when your beneficiary will begin accessing Educational Assistance Payments (EAPs). Then, you can determine if there are remaining investment funds that you’ll be taxed on. These are Accumulated Income Payments (AIPs).
A simple RESP check-up: Are you on track?
Now that you have a basic idea of how you should invest in the RESP, give your strategy a quick check. Ask yourself the following questions to identify any changes you might need to make:
- Does my investment strategy reflect my child’s age? For instance, if the investments are primarily GICs but your child is still in elementary school, you may want to switch to a higher mix of stocks to maximize growth.
- Have I reviewed my RESP in the last year? If the answer is no, it’s time to review the account. Don’t forget to see whether you’re getting the government matches for your contributions.
- Am I contributing regularly? If you’re only contributing when you happen to remember, you might be missing out on investment opportunities. Consider automating your investments so you stay on track.
- Do I know whether my investments become less risky over time? You can speak with a financial advisor or look at the types of investments in the RESP. Generally, Canadian equity index funds and international developed markets are riskier than government bonds, GICs, and high-interest savings accounts.
- If markets dropped tomorrow, would I still feel comfortable with my RESP? This question is closely tied to the account timeline. That’s why it’s important to be conservative with your investments the closer your child is to needing the funds.
If you answered “no” or “I’m not sure” to any of these questions, it might be time to make some changes.
An easier way to manage your RESP over time
Monitoring an RESP can seem like a lot of work, especially if you’re not confident in adjusting your investments. Fortunately, some RESP providers, including Embark, offer age-based portfolios that automatically adjust as your child grows.
An age-based portfolio evolves from growth-oriented investments (like stocks) toward more conservative investments (like bonds and savings accounts) as your child gets closer to post-secondary education. With no ongoing monitoring or rebalancing needed on your part, you can rest assured that the funds you set aside for your child’s future will be there when they need them.
FAQs
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