One of the first things I did when we brought our son home from the hospital was open an RESP.
The Registered Education Savings Plan, or RESP, is a tax-advantaged investment account that you can use to save for your child’s postsecondary education. Similar to a TFSA, you don’t get a tax refund when you contribute, but investment gains are tax-free, and the money can be withdrawn tax-free to pay for school. The one major downside is that if your child doesn’t end up going to postsecondary, you can get your contributions back, but the rest will be hit with taxes and clawbacks.
RESPs also include a government matching portion called the Canada Education Savings Grant, or CESG. Your contributions are matched at 20 per cent per year, up to $500. So if you contribute $2,500 per year, you get the maximum grant. There is also an additional amount you can get called the Canada Learning Bond for low-income families.
These matching programs – with free money! – are exciting enough. However, the real advantage to the RESP is something that’s often overlooked, and that’s the investment horizon. It determines how risky you can afford to be.
If you need the money in less than a year, it makes sense to put the money into a savings account. If you don’t need the money for five, 10 or 20 years, you can invest in higher-returning but more volatile assets like stocks.
Opinion: Make smart RESP withdrawals to maximize the financial benefits
It can also be a difficult question to answer. When we’re looking at cash sitting in our bank accounts, we don’t know exactly when we’ll need it. It could be 10 years from now – or tomorrow.
The RESP, however, decides for you.
RESP are meant to provide for postsecondary education. That means that the money generally can’t be used until your child turns 18. This has a big impact on your investment decisions.
The reason that short investment horizons force you to be conservative is that higher-returning assets like stocks are generally more volatile. In any given year, stock markets can soar or drop a stomach-churning amount.
Looking at the price data of XIC, the oldest exchange-traded fund tracking the TSX, the highest one-year return was 30.62 per cent in 2025. The worst was -33.63 per cent, during the depths of the sub-prime mortgage crisis of 2008.
However, what’s interesting is what happens when we widen our investment horizon from one to five years. Measuring the same stock market performance over rolling five-year windows, the best performance becomes 17.62 per cent, and the worst is 0.47 per cent. The range of possible outcomes has narrowed considerably, and in fact, has never been negative over the lifetime of this fund.
Widening out our investment time frame to 10 years, the highest annualized return becomes 12.54 per cent, and the lowest 4.03 per cent. And over 18-year windows, which is the investment time frame we’re looking at, the highest return becomes 8.94 per cent, with the lowest 6.59 per cent.
I’m using the TSX as our benchmark because we’re Canadian, but this effect is also observable on the U.S. Index, the S&P 500 (SPY), as well as the MSCI EAFE (EFA).
The best weapon to slay volatility is time, because the more time you have, the more predictable your returns become. Stocks always make money over the long term, and as it turns out, when your time horizon is more than 15 years, even the volatile S&P 500 has never lost money.
In any given year, a 100 per cent stock portfolio can be brutal, gaining or losing double digits percentages, but over a long enough holding period, an all-stock portfolio doesn’t seem so risky anymore.
So, if a new parent opens up an RESP and contributes enough to get the full CESG match every year until they hit the lifetime max CESG of $7,200 and invests the entire amount in a TSX index fund like XIC, the worst case performance they can expect would be 5.76 per cent. At that return level, by the time their child graduates high school, their RESP would be worth almost $79,000, or more than double what the parents put in.
And if they get returns at the top end of that range of 8.2 per cent, that RESP would be worth over $102,000, or almost triple their investment.
So, if you have a child and you haven’t opened up an RESP, do it now. If you know how to use it properly, it’s a gold mine.
Kristy Shen and Bryce Leung retired in their 30s and are authors of the new book “Parent Like a Millionaire (Without Being One).”
