Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Navigating the RESP

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Image via Pexels: Ketut Subiyanto

By Megan Sutherland, BMO Private Wealth

Special to Financial Independence Hub

The days are getting shorter, nights a bit cooler and with September now upon us, back to school is on the minds of parents nation-wide.  Since 2007, the average cost of undergraduate tuition fees in Canada has increased 55% and, according to a 2023 poll, 81% of parents believe it’s their responsibility to help pay for post-secondary costs.  Conversations I’m having with clients, friends and family certainly corroborate these numbers, making it timely to talk about the Registered Education Savings Plan (“RESP”).

For decades Canadians have been able to utilize the RESP, a program developed to incentivize savings with grant money (Canada Education Savings Grant, “CESG”), and preferential tax treatment.  Who doesn’t love free money!

Okay, so what’s the deal?

  • What is the maximum amount I can contribute per beneficiary?
    • A lifetime contribution limit of $50,000 per beneficiary.
  • How can I receive the maximum CESG?
    • Contribute up to $2,500 per year to receive 20% in CESG.
  • What if I’ve missed years of contributing?
    • You can catch up one additional year of CESG per year.
  • How much is the CESG grant?
    • Maximum of $7,200.
  • Is there an age limit on receiving CESG?
    • The CESG is available until the calendar year in which the beneficiary turns 17. However, there are specific contribution requirements for beneficiaries aged 16 or 17.
  • What is the tax treatment?
    • Contributions are not deductible but can be withdrawn tax-free.
    • Investment growth and CESG are taxed to the beneficiary when withdrawn for qualifying educational purposes.
  • Do you have to be the beneficiary’s parent to open one?
    • Any adult can open an RESP on behalf of a beneficiary – parents, guardians, grandparents, other relatives or friends – however, contribution across all plans must not exceed the maximum per beneficiary.

If you hope to have an aspiring doctor on your hands, consider harnessing the power of compounding to amp up your savings and open a plan as soon as possible!

Compare:

  1. Contribute a total of $36,000 over 14.4 years and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$80,000
  1. Contribute a $14,000 lump-sum in year one, then $36,000 over 14.4 years, for a total of $50,000, and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$115,000

 

Net benefit from additional $14,000 contribution in year one: approximately $20,000.

Saving to Attract CESG Only vs. Saving to Maximize Growth and Attract CESG 

Just like everything in life, make sure to read the fine print.  Keep in mind the following tips and traps:

  1. Open a Family Plan. Growth can be shared by all beneficiaries and the CESG money may be used by any beneficiary to a maximum of $7,200.
  2. Be prepared if the funds aren’t depleted by school costs. Contributions can be withdrawn by the subscriber without penalty. However, remaining CESG is clawed back. Growth in the RESP can be contributed to your RRSP (up to $50,000 if you have available contribution room), otherwise it is taxed at your marginal tax rate upon withdrawal by the subscriber, and there is an additional penalty tax of 20%.
  3. Choose investments wisely. Taking too much risk could result in losses that may create hard feelings or regret. Make sure to plan for withdrawals, potentially transitioning assets to cash, laddered bonds or GICs to ensure funds are available to pay for education costs.
  4. Put it in your estate plan. If you are married, consider opening the RESP in joint name. If you aren’t married or open the RESP in your name only, name a successor subscriber in your Will.
  5. U.S. citizens beware! The U.S. does not recognize the RESP as an exempt account type. Therefore, any earned income in the account is reportable on your U.S. tax return and can result in double taxation. Continue Reading…

How a Fed Rate Cut could bolster Canada’s largest Covered Call Bond ETFs

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By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog) 

In late August, Federal Reserve chairman Jerome Powell caused a stir among the investing community when he provided the strongest signal yet that the U.S. central bank is gearing up for interest rate cuts starting in September.

At the time of this writing, we are just one day away from that crucial decision. So what will this mean for  the yield curve, the direction of the Fed, how the change in policy is affecting markets, and the implications for Harvest Premium Yield Treasury ETF (HPYT:TSX) and the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX) in the final third of 2024. Let’s explore!

How does the yield curve function?

The yield curve, which is a representation of different bond yields across various maturities, can take varying shapes and curvatures. However, the most talked about is the shape of the yield curve in particularly one that’s either normal or inverted. A normal yield curve will have short-term bond yields that are lower than long-term bond yields. This encapsulates the time and risk premium associated with investing further into the future. However, in a period wherein central banks are seeking to slow economic growth/inflation, near-term rates will be raised in a manner that leads to higher short-term yields versus long-term yields. This is called an inverted yield curve, a much rarer occurrence.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

In practice, the difference between the 10-year yield versus the 2-year yield of government bonds is the go-to measure or gauge. The yield curve has been inverted for some time and became dis-inverted (Normal) in August 2024. That is a sign that shorter-term rates are coming down. This likely precedes meaningful interest rate cuts.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

What drives the Federal Reserve?

The Federal Reserve (Fed) has a dual mandate: to achieve maximum employment, and to keep prices stable. Despite taking on one of its most aggressive interest rate hiking cycles in history to regain price stability, inflation has failed to return to the target of 2%, albeit subsiding in recent months. The lower levels of inflation come with slowing economic data and weaker-than-expected jobs data, which belies the Fed’s goal of achieving maximum employment. So, what’s next?

With inflation coming down, the Fed members seem ready to cut short-term rates to alleviate the negative impact of higher interest rates on the economy. But before we get excited, it’s worth noting that the Central bank tools traditionally take time to filter through to the economy. Interest rate cuts may not have an immediate impact on the economy and broader markets but will filter over time.

Ultimately, this shift in policy should return the inverted yield curve to a normal yield curve.

Rate expectations: What is already priced in?

The next Fed rate announcement meeting is on September 18, and the market is already pricing in the first rate cut. The size of the cut is still up for debate, but it is likely to be 25 basis points, with a smaller chance that it could be larger at 50 basis points.

Looking further out to the Fed’s remaining two meetings for the rest of the year, the market expects the Fed to cut rates again. That would represent a total of 100 basis points of cuts expected by the end of 2024. Moreover, the market has priced in 10 rate cuts, or 250 basis points, of total interest rate cuts. These are priced in and expected to occur throughout 2025 with the ultimate destination of 3.00% on the overnight rate.

However, interest rates further out the yield curve have also recently moved down quite a bit. This is what’s known in bond-speak as a “bull steepening” — as the curve normalizes yields across maturities shift lower too, and thus bond prices move higher. Indeed, the narrative continues to shift toward the imminent start of this rate cutting cycle.

The 10-year yield was 3.65% at the time of writing. That is already down significantly – 137 basis points – from the peak of interest rates in October 2023.

The implications for the yield curve

What will happen to the yield curve going forward? Portfolio Manager Mike Dragosits, CFA, expects the yield curve to normalize due to several existing factors. The tightening cycle is ending, and the Fed is poised to embark on a rate-cutting cycle. So, this would mean that short-term bond yields may fall faster and stay relatively lower than long-term bond yields. Continue Reading…

Why it’s never too late to Invest your Money

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Worried you’re behind the “Magic 8 Ball” when it comes to investing in retirement savings? If your retirement fund is a bit anemic (or nonexistent), there’s no time like the present to get started! It’s never too late to invest your money but do you know where to start? Will explore active, passive, and wise investment options in this quick guide to your financial freedom.

Adobe image courtesy Logical Position

By Dan Coconate

Special to Financial Independence Hub

Investing is often seen as a young person’s game. But the truth is, it’s never too late to start investing your money.

This is especially relevant for retirement planners and seniors. Whether you’re planning ahead or looking to make your savings work harder, investing can play a crucial role in your financial future. Below, we take a closer look at why you should start investing, what to look for when you invest, and how to prepare your family for the future with this wise financial decision.

Is it really never too late to Invest?

Many people think investing is only for the young. But countless success stories prove otherwise. Take Colonel Sanders, for example. He started Kentucky Fried Chicken (KFC) at the age of 65. Another prime example is Ray Kroc, who expanded McDonald’s in his 50s. These stories highlight that it’s possible to achieve financial success later in life, including when you think it’s time to retire.

Certain investments work for different age groups, which makes it easier for seniors to start investing. For instance, dividend-paying stocks offer a steady income. Bonds provide low-risk options suitable for conservative investors. Even real estate is a lucrative investment at any age.

Starting later can be just as rewarding as investing early. The key is finding the right opportunities. By doing so, you can make your money work for you, irrespective of your age and stage in life.

Active vs. Passive Investments

Active investments require regular attention. Examples include actively managed mutual funds and day trading. These investments aim to outperform the market. They need more effort but can offer higher returns.

Passive investments, on the other hand, are more hands off. Index funds and ETFs are good examples. These options track market indexes and require less management. They are ideal for those who prefer a simple approach.

Understanding the differences between active and passive investments is important. By knowing your options, you can choose the one that suits your lifestyle and risk tolerance. Whether you prefer to be hands-on or hands-off, there’s an investment strategy for you.

Benefits of Investing at a Later Stage

Investing later in life offers long-term financial security. It helps grow your money and secures enough funds for retirement. A well-planned investment can provide a steady income stream and offer peace of mind. Continue Reading…

Vanguard unveils new Ultra-Short Canadian Government Bond ETF

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In what it says is its first new ETF announcement in four years, Vanguard Investments Canada Inc. today announced a new Fixed-Income ETF designed to met investors’ short-term savings needs. Here is the full release on Canada News Wire.

Trading on the TSX under the ticker VVSG, Vanguard Canada says the Vanguard Canadian Ultra-Short Government Bond Index ETF offers AAA-rated high-quality government bonds and treasury bills with a low management fee of 0.10%. It seeks to track the Bloomberg Canadian Short Treasury 1-12 month Float Adjusted Index. The release says the ETF will invest primarily in public, investment-grade government fixed-income securities with maturities of less than 365 days issued in Canada.

Vanguard Canada’s first new ETF in 4 years

In an email to me, Vanguard Canada spokesman Matthew Gierasimczuk confirmed “It’s our first ETF launch in four years.” It brings the total number of Vanguard ETFs in Canada to 38, with $80 billion (CAD) in Canadian ETF assets under management. You can find the full list on its website here. Continue Reading…

7 Leaders reveal their favorite Index Funds for Financial Independence

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Photo by Mikhail Nilov on Pexels

 

In the quest for Financial Independence through savvy investing, we’ve gathered insights from Presidents and CEOs to share their top index fund picks.

From choosing a high-dividend yield ETF to recommending a total stock market index fund, explore the seven expert recommendations that could pave your path to financial freedom.

 

 

  • Choose High-Dividend Yield ETF
  • Suggest Vanguard Total Stock ETF
  • Prefer Zero Fee Total Market Fund
  • Select Australian-Domiciled International ETF
  • Opt for Monthly Distribution Index
  • Pick Broad-Market S&P 500 ETF
  • Recommend Total Stock Market Index Fund

Choose High-Dividend Yield ETF

My go-to for building Financial Independence has got to be the Vanguard High-Dividend Yield ETF. A lot of folks who’ve made it to FIRE (Financial Independence, Retire Early) live off dividends, and if that’s your goal, this ETF is worth considering. It sports a yield of 3.65% and keeps costs low with an expense ratio of just 0.06%. The fund aims to mirror the performance of the FTSE High-Dividend Yield Index.

It’s packed with stocks known for higher-than-average yields. You won’t find many fast-growing tech stocks here because those companies usually reinvest their profits into growth rather than paying out dividends. Instead, the ETF focuses on older, established companies with a strong history of profitability. As of the last update, the top five holdings included big names like Johnson & Johnson, JPMorgan Chase, Procter & Gamble, Verizon Communications, and Comcast.

While it might not match the S&P 500 in terms of rapid growth or impressive returns, the stability and consistent income it offers can be a major advantage, especially if you’re looking for reliable dividend income. — Eric Croak, CFP, President, Croak Capital

Suggest Vanguard Total Stock ETF

As a CFO, I recommend index funds like the Vanguard Total Stock Market ETF (VTI) for building long-term wealth. It provides broad exposure to over 3,600 U.S. stocks with an ultra-low expense ratio of 0.03%. 

Over the past 25 years, the total U.S. stock market has returned over 9% annually. While volatile, for long-term investors, index funds are a simple, low-cost way to earn solid returns. I have leveraged index funds in my own portfolio and for clients to build wealth over time. 

Vanguard’s scale and expertise allow for minimal costs and maximum tax efficiency. For small or large portfolios, VTI should be a core holding. For clients aiming to retire early or build wealth, low-cost broad market exposure is the most effective strategy. Total U.S. stock market funds provide the broadest, most diversified exposure available. — Russell Rosario, Owner, RussellRosario.com

Prefer Zero-Fee Total Market Fund

The Fidelity Zero Total Market Index Fund is my top pick for building Financial Independence. It covers the full spectrum of the U.S. market without charging any management fees, which means your investment grows faster without extra costs. This fund’s wide exposure to both established and emerging companies helps balance risk and reward. For anyone serious about long-term growth, it’s a great tool to steadily build wealth over time. — Jonathan Gerber, President, RVW Wealth Continue Reading…