Having a baby is a life event wrought with emotion. The minds of most parents-to-be tend to reel with excitement while also harboring many concerns about the challenges ahead. Among the most common worries, understandably enough, is money.
If you've got a baby on the way, as you look forward to one day seeing your little one take those magical first steps, here are some financial first steps you can take yourself to prepare:
1. Check your insurance. Life and disability insurance are critical. Life insurance provides financial protection if an income-earner in your family dies. Term insurance can be a cost-effective option. It offers protection for a specific period of time — say, 20 years — at which point many children will be relatively self-sufficient, and the loss of income less harmful. Of course, you'll also need to ensure that your will names a guardian to look after your children in case of your death while they're still minors.
Disability insurance provides financial protection if a breadwinner becomes disabled and no longer can earn a living. While some employers offer disability insurance, the policies often don't provide enough income to cover all expenses. And Social Security disability benefits might not offer the protection you expect. For instance, to obtain the benefits, the breadwinner typically must be unable to work at any job. So, consider buying your own policy that will pay if you can't continue in your current job. The distinction might make a difference.
2. Review dependent care tax breaks. If you pay a caregiver to watch your baby so you can work, you may be able to claim the dependent care credit. Depending on your adjusted gross income, this dollar-for-dollar reduction of your tax liability can total between 20% and 35% of eligible child care expenses — up to $3,000 for one child, or $6,000 for two or more children. The caregiver typically can't be a dependent, your spouse or a parent of the child.
Another option is a dependent care assistance program, also often called a dependent care Flexible Spending Account (FSA). This is an employer-sponsored program that allows parents to set aside up to $5,000 pretax annually (or up to $2,500 if you're married and file separately) to cover qualified child care expenses. Important note: You can't use both the dependent care credit and an FSA for the same expenses.
3. Start saving for education. The sooner you begin saving for your baby's education, the more you can leverage the value of monthly compounding. For example, if you save $200 per month starting at your baby's birth and earn a 6% return, you'll have nearly $78,000 in 18 years!
One of the best options, potentially, is a Section 529 education savings plan. It allows you to save for college expenses, as well as K-12 tuition expenses. Contributions aren't tax-deductible for federal purposes, but many states offer tax benefits. Withdrawals used for qualified education expenses (limited to $10,000 per year for K-12 tuition) aren't subject to federal income tax and typically aren't subject to state income tax either.
As you plan for your child's education, be sure to balance your own need to save for retirement. Bear in mind that your child likely will be able to use loans, work, scholarships or grants to help with college expenses.
4. Talk to your professional advisors. The specific financial and legal moves you should make before the arrival of your child will depend on the distinctive facts and circumstances of your current life situation. It's a good idea to speak to an attorney. For help with budgeting and tax planning, a CPA can provide invaluable assistance.
Get in touch today and find out how we can help you meet your objectives.
