Ask an expert: Educated savings

Contributing $167 per month to a registered education savings plan (RESP) from your child's birth to age 18 will add up to more than $71,000. Although there are other education savings options, such as savings or investment accounts you open "in trust" for your child, only resps offer the benefit of a substantial contribution from the federal government, through the Canadian Education Savings Grant (CESG). Free money – yay!

You can contribute an annual maximum of $4,000, and the per-student lifetime limit is $42,000. The CESG will match up to 20 per cent of contributions to a maximum grant of $400 per year (and under new legislation, up to 40 per cent of the first $500 contributed, depending on income) until the student turns 18, with a lifetime limit of $7,200. If you miss a year, you can double your contributions the next year and receive a maximum grant of $800.

You can open either a family or an individual RESP. If you have more than one child, the family option allows the sharing of benefits. This means that although contribution and CESG limits apply to each individual within the plan, if one child doesn't use her full share of the money, the other can use the remainder later for that law degree. Anyone can open an individual RESP for one child and contribute money to it, but only immediate family members can contribute to a family plan.

There are two main types of plans.
A large group of unrelated investors make contributions to a scholarship fund (much like a mutual fund). All contributions for children of the same age are pooled together. The income is divided between the students who actually go on to post-secondary education. But be careful: while scholarship funds are convenient because someone else is managing them, you may face stiff penalties (including the possibility of losing your money) if you stop contributing or your child starts a hip-hop band rather than continuing his education. Read your contract thoroughly.

These are available from almost any financial institution. They have the same investment range as registered retirement savings plans – you can choose anything from guaranteed investment certificates to mutual funds and stocks. While you'll need to take a more active role in making investment decisions and weigh the risks, you have greater control, flexibility and the potential for higher returns. If your kids have had enough after high school, or you can't afford to continue to contribute, you don't lose your contributions, and the income earned on that money is lost only if your RESP contract says so. CESG amounts go back to the government.
The best time to start contributing to an RESP is now. Don't wait until you can contribute $167 per month – even if you can put aside only a few dollars a week, begin today.
For more information, enter CESG in the search engine at www.hrsdc.gc.ca or call 1/888/276-3624.

Financial expert Lori Bamber has spent more than 16 years helping Canadians take care of their money.