By Rita Li

This year’s back to school has been a milestone for our family as I joined a long line of anxious parents dropping their kids off for the first day of junior kindergarten or, as we tell our little one, the “big kids’ school.”

Raising a child is no small feat and not one to be taken lightly because the overall costs are now estimated at anywhere between $300,000 and $500,000, and that is before university or other

higher education pursuits

. Personally, I have been a lucky beneficiary of Ontario’s $10-per-day initiative for daycare and was able to send my little one to daycare at about $500 per month. Prior to that, we had to hire a full-time nanny since neither my husband nor I could take any real time off.

The cost of education is top of mind for younger clients with small children. Other than topping off their

registered education savings program

(RESP) each year and receiving the matching government grants, they are asking about additional savings to further assist their children’s growing needs. The trick here is to balance their children’s financial needs with their own

retirement security

.

Questions such as “Should we be looking at private schools?” tie in with the parents’ desired retirement age and lifestyle. Like many other educational institutions, the costs of private schools have skyrocketed.

But there are some practical steps you can take to secure your children’s financial future and let’s start with the RESP.

For most people with young children, starting an RESP early is always a good idea. It allows for tax-free investment growth, which is the main benefit. In these cases, the investment time horizon is long, and a growth-oriented investment strategy makes the most sense.

The second consideration is a contribution strategy. Most parents would like to maximize the matching government grants, which can reach $7,200 per beneficiary. Parents can consider putting a lump-sum contribution first and then making an annual $2,500 per beneficiary contribution to maximize the $500 per beneficiary, per year grant.

This strategy allows the best of both worlds. The initial lump-sum contribution allows for the maximum tax-free growth and the annual contribution will help to maximize government grants. The exact projected value will depend on the rate of return assumption we use, and there are calculators to figure out the end account value for different strategies.

Insurance can also be a great tool for intergenerational wealth transfer. Our older clients would like to contribute to their grandchildren’s success and an insurance policy on the grandchildren can work beautifully for that. The initial contribution does not need to be a large amount, but it can come in handy by the time the grandchildren reach age 18 and need financial assistance to pay tuition fees.

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This strategy is commonly referred to as the waterfall concept and, if structured properly, it can skip a generation and directly benefit the grandchildren. A $20,000 premium for an insurance policy on your grandchildren can grow exponentially in a tax-free environment. The policy can be transferred to the grandchildren at age 18 without any tax impact. Any withdrawals from the policy after the transfer will be taxed in the hands of the grandchildren at their effective tax rate. That is a gift your children and grandchildren will never forget.

Rita Li is a portfolio manager and wealth adviser at RBC Dominion Securities.