With school just around the corner, as students are beginning to sharpen their pencils and preparing their books, parents may also be sharpening their financial plans to make room for post-secondary education costs.
Like most things today, these costs on the rise – according to Statistics Canada, students enrolled full-time in undergraduate programs paid on average $6,693 in tuition for the 2021/2022 academic year, up 20% from the average $5,586 paid in the 2012/2013 academic year.
Why Should You Have an RESP for Your Child?
Rising costs coupled with an uncertain macro environment, higher borrowing rates and a looming recession, might make a biophysics exam more appealing than testing investors’ financial planning smarts! Luckily, Canadians have access to mutual fund options suited for this type of investment horizon.
For Canadians, the Registered Education Savings Plan (RESP) offers a tax-efficient vehicle to start saving for future education. Unlike the Registered Retirement Savings Plan (RRSP), RESPs:
- Have no annual contribution limit,
- Have a lifetime contribution limit of $50,000, and
- Requires the beneficiary to be under the age of 31 at the time of contribution.
Plus, with an RESP, you get access to free money, through the government contribution. Under the Canada Education Savings Grant, the government will give each RESP 20% on the first $2,500 contributed annually to an RESP, to a maximum of $500 per beneficiary per year, meaning the lifetime maximum per beneficiary is $7,200, up to age 18.
Why Consider a Target Date Fund for an RESP?
The flexibility of the plan means investors can contribute lump sums or spread-out contributions more gradually – potentially further complicating the decision on how to allocate and adjust the portfolio over time.
Target date funds offer investors professional investment management where the asset mix between stocks and bonds is adjusted based on the anticipated withdrawal date, also known as the fund’s vintage.
While many think of target date funds as retirement vehicles, they offer equal benefits to those looking to save for post-secondary education.
The Best Target Date Mutual Funds to Consider for an RESP
Here’s a look at some top performing target date mutual fund suites available to Canadian investors:
Before you go and buy any of these funds to add to your child’s education fund portfolio, however, it is important to remember two things:
- Diversification
- Time Horizon
Investors who choose target date options for their RESPs have a built-in mechanism that factor both variables. Any allocation outside these mutual funds could impact the overall outcome when the beneficiary is ready to redeem.
