6 things parents should know about RESPs

Registered Education Savings Plans (RESPs) can be an excellent way to save up the cash for your kids' pricey university education. Here's what you need to know to take full advantage.

• As with any savings plan, it pays to start early.
• Instead of hospital bouquets or baby clothes, why not ask for donations to the RESP?
• Are you receiving the federal government's Canada Child Tax Benefit? Try to sock it away every month. You'll be glad you did later on.

• Most financial advisors regard RESPs as the way to go. It's because you can get a federal government grant of up to $400 a year on your contribution.
• Here's the catch: although you can contribute a maximum of $4,000 per child per year, you only get a grant on the first $2,000 in contributions.
• If you have an extra $2,000 per child to spend, you might choose to invest it in something more flexible.

• Unlike RRSP contributions, you can't deduct an RESP contribution from your income.
• However, you don't have to pay tax on the investment earnings accumulating in the plan.
• When you turn it over to your university-age son or daughter, they'll pay tax on it. But since they'll be students, they should be taxed at a much lower rate.

• If you have more than one child, you're probably better off with a family plan.
• Family plans can be set up with multiple beneficiaries, all of whom are related to the subscriber by blood or adoption. So if one child doesn't go, the others can still use the cash.

• Group or pooled RESP plans sold by non-profit scholarship companies sometimes have limitations.
• These can include the institutions that can be attended, forfeiture of earnings if your child opts out of university or limits on how much money can be pulled out per year.
• Unless you're absolutely certain that your son or daughter will be heading off to university, opt for a more flexible self-directed plan.

• If your named beneficiary ends up not using the money, you have to relinquish the grant money to the government and pay tax on the earnings.
• But don't sweat it. You can always get your original contributions back.
• You can transfer as much as $50,000 of the earnings to your own RRSP, providing a) your plan allows it, b) you've had it for at least 10 years and c) you have enough unused contribution room.
• Whatever you can't transfer becomes taxable income, and you get charged a 20 percent penalty tax on top of that (30 percent in Quebec).

RESPs are a good way to save up for your child's education bit-by-bit instead of all at once. But some RESP strategies are better than others, so be sure to do the research before starting one.