Opening up your Child’s RESP and locking in 20% returns per year!

Hey all, so today was an exciting day for us – or more specifically I guess baby FIC even though he doesn’t know it yet.

Today was the day we finally got into the bank to open up his RESP!

So we’re going to go over a few perks to opening up an RESP and things you should consider when doing so:

1. Grant’s and guaranteed returns

So as most of you out there with children know, there are grants associated with opening up a child’s RESP. These grants become a government match of 20% to your deposited funds up until $500.

To make it straight forward I’ll say what our plan is: place $2,500 into our son’s account and receive a $500 grant to also place into the account (the max the government will match) leading to a total of $3,000 per year. You can deposit up to $50,000 in the Child’s lifetime and can put more than that in per year without getting government matching but this is how we feel it’s best to do it.

What this means is we’re locking in 20% returns on our son’s education fund before it’s even invested! Hard to argue with the logic behind opening this account.

2. Self-directed vs. Bank mutual funds

We’re advocates of learning the basics behind investing and doing your own investing. We handle all of our accounts that we’re allowed to the exception being the work savings plans where we don’t have a say in managing them only which mutual fund the money is placed in.

This philosophy is no different for the RESP.

Just for the sake of it we met with the bank and spoke about our options, you never know what they may offer at any given time maybe they had a new fund with extremely low MER’s that would have blown our socks off? Of course this wasn’t the case as the “best” we could find was a 1.17% S&P500 fund.

To get a decently balanced portfolio managed they wanted a 2.2% management fee so we had to decline. Once the bank advisor knew that we were fairly competent/comfortable with the market and investing they agreed we were better off going with self directed as well – an admission I wasn’t expecting.

So for baby FIC we will be using commission free ETF’s with low MER’s found through scotia’s iTrade self directed accounts. We’re planning on splitting the money between US, Canadian and Emerging Market ETF’s to give him the best chance at stable returns between now and when he needs the funds.

3. Projected growth of an RESP

As you can see, we’re expecting this $2,500 per year we put in for our boy over the next 17 years to grow into roughly $100,000!

That’s assuming that we just drop the money in and invest it at the start of each year and receive a ~7% investment return which should be around the number that we get when all is said and done but of course there’s no way of knowing that.

For a quick reference to how important fee’s are with investments if you were to take off even 1% for additional MER that brings the projection down $10,000 on these relatively small numbers over a relatively short period of time. (Just imagine what it does to hundreds of thousands of dollars over an entire working life).

4. A little bonus

The little bonus that was unexpected was while going over our accounts we swapped our checking account over to a new account that wasn’t available to us last time we were in and in short it:

-Reduced our monthly fees to $0 (with $5,000 minimum)
-Reduced our Visa fee to $0 (from $129/yr)
-Gave us 10 free iTrade trades (less valuable now we won’t pay for our trades anyways)
-Increased our savings interest by a small amount (something > nothing)

Anyways, that’s all we have for you today. We had a fun time looking into the RESP’s today and thought we would share with our readers what we found.

As always this isn’t meant to be investment advice simply our experiences that we’re sharing with you so please contact a professional for help with you or your children’s investing decisions.

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Thanks for stopping by,

FIC.