As you may know, Emily and I welcomed our first born son, Samuel into the world on June 10th at 6:53p. It was by far, the most exciting day of my life. But along with the excitement came the reminder of a whole new financial challenges and decisions for any growing family. Outlined below are four key financial considerations to help new parents prepare for many of life's unknowns.
Prepare for the Unexpected: Check your individual health insurance policy for specific guidelines on adding coverage for your newborn (most plans give parents 30 days after the birth of the child). Missing this deadline may require waiting until the next annual enrollment period to add your baby to your plan.
Life insurance is an important aspect of your financial plan and something that you may now want to consider. You may also want to consider purchasing umbrella liability insurance (particularly if hiring an in-home caretaker for the baby), to provide additional protection in case an accident occurs on your property or if you are sued. On the other hand, skip insurance that you don't need: Unless you depend on your children for financial help, insuring young children is usually unnecessary.
Kick-Start Your College Savings Plan: The most compelling college-savings vehicles offer attractive tax advantages. State-sponsored 529 plans have built-in tax incentives, and the age-based all-in-one 529 options allow you to invest money in a portfolio that gradually becomes more conservative as your child nears college age. If the baby's grandparents or favorite aunts and uncles would like to save on your child's behalf, they too can make state tax-deductible contributions into a 529 plan.
But, 529 accounts aren't for every family. They do come with some strings attached. The funds invested within a 529 plan must be used for qualified education expenses at accredited institutions. If you take unqualified distributions from a 529 account, you'll owe tax and penalty on the earnings. Before you make a decision on the best funding option for your family, give us a call.
Don't Forget Basic Estate Planning: Another key step is to designate a legal guardian for your child; a person who understands and is comfortable with the implications and responsibilities involved. You should also consider drafting a will and living will.
Many assets can be transferred to a beneficiary at death, but be aware that assigning minors as beneficiaries presents several potential pitfalls. For example, minors cannot legally own any assets. So if you want to name a child under 18 as your beneficiary, he would need a court-appointed guardian, which can be a costly process. Instead of naming your children as direct beneficiaries, consider creating a trust fund (after death a trust doesn’t go through the probate process like a will does). A special IRA trust may be best for retirement accounts.
Take Advantage of Tax Benefits: Start by applying for your child's Social Security number right away for tax purposes. All parents are eligible to claim each child under 19 as a dependent on their tax returns, which reduces taxable income by what is called the dependent exemption ($4,050 in 2017). This exemption also applies if your child is a full-time student under the age of 24. Another potential tax break for parents is the $1,000 annual child tax credit, which applies to children under 17, provided your income falls below certain thresholds. If you're paying for child care, your workplace might also provide ways for you to save on taxes. Through flexible spending accounts (FSA), parents can put away up to $2,600 each in pre-tax dollars for child care (if their child is under the age of 13) through an employer-sponsored program. Parents may also qualify for the child-care tax credit as long as both spouses are working and the child is under 13. Unfortunately, you can't double up on the FSA and the tax credit.
529 plans are tax-deferred college savings vehicles. Any unqualified distribution of earnings will be subject to ordinary income tax and subject to a 10% federal penalty tax. Tax law is ever-changing and can be quite complex. It is highly recommended that you consult with a legal, tax, or financial professional with any questions or concerns. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement, and the official statement should be read carefully before investing.