There’s so much to do before and when you become a parent, and many of the most important steps to take are in the area of finances. Here are seven financially related ways to prepare for parenthood. We are here to help you navigate all these and more.
1. Get your child a Social Security number
You will need to get your child a Social Security Number (SSN) before you file a tax return as a new parent. Typically, you can request an SSN when you fill out the birth registration form at the hospital. However, if you don’t give birth in a hospital or forget to check the appropriate box, you can request an SSN at your nearest Social Security Administration branch.
2. Review your insurance coverage
If you and your partner do not have life insurance, you will want to get this coverage in place now that you are parents. You want to transfer the risk of something happening to either of you to an insurance company. For example, if either you or your partner dies prematurely and you have life insurance in place, the surviving partner will receive a death benefit check that will help pay for everything your child needs.
Without life insurance in place, premature death of either parent could easily cause a hardship, whether the parent who passes is the primary income earner or the primary care giver for the child.
Work with your financial advisor to determine what other types of insurance you need, such as disability insurance. If you or your partner were to sustain a serious injury or illness, you’ll want to, again, transfer that risk to an insurance company so you can receive money to care for your child while the injured or ill parent recovers.
You can even take out an insurance policy on your baby or child. Now, why would you want to do that?
When you buy life insurance for children, they are guaranteed to have coverage, even if they develop a health condition later in life. For example, let’s say your family has a history of genetic medical conditions. If you buy a life insurance policy for your children, you won’t have to worry about whether they will be denied coverage later in life if they are diagnosed with any medical conditions. You also are guaranteeing that they will have coverage if they take up dangerous hobbies.
The younger your child is when you buy a policy, the cheaper it will be. With a whole life policy, the low rate you lock in at the time of purchase will often be guaranteed for the duration of the policy.
Again, ask your financial advisor for guidance on insurance coverage. Getting the right types of insurance in place, with sufficient coverage, is the most important financial step you can take to protect your child’s future!
3. Research tax breaks for parents
Once you become a parent, you might qualify for some tax breaks, including the child tax credit, the adoption tax credit and the self-employed health insurance deduction.
The child tax credit was established in 1997 as a part of the Taxpayer Relief Act, giving families $400 per eligible child. The credit has been increased and expanded throughout the years, and in 2001, it became refundable. The child tax credit provides an additional $2,000 per child per year to caregivers raising qualifying children.
According to the IRS, you can claim the child tax credit for each qualifying child who has a Social Security number that is valid for employment in the United States. For 2023, you qualify for the full amount of the credit for each qualifying child if you meet all eligibility factors and your annual income was not more than $200,000 ($400,000 if filing a joint return) for the year. Parents and guardians with higher incomes may be eligible to claim a partial credit.
4. Start planning for childcare
You and your partner might not need to plan for childcare if one of you will be staying home with your child until he or she starts going to school. And consider yourself lucky if you have family members who can take care of your child if both you and your partner work.
If you will need childcare at some point in the future, start reviewing your options early. Newborn care can be costly, and in some locations, this type of care is difficult to find. And daycare for toddlers can book up quickly with the best providers.
5. Set up a Flexible Spending Account or a Health Savings Account
If either you or your partner works for a company that offers a Flexible Spending Account (FSA), take advantage of it.
As a new parent, one of the best advantages of an FSA is the ability to pay for childcare expenses. An FSA is a pre-tax account sponsored by an employer.
Here’s how an FSA works. You put money into the account and use it to pay for certain out-of-pocket health-care costs, including like deductibles, copayments and some drugs. You don’t pay taxes on this money, which means you will save an amount equal to the taxes you would have paid on the money you set aside.
Once you spend money from the account on a qualified purchase, you will submit a claim to the FSA through your employer with proof of the medical expense and a statement that it hasn’t been covered by your plan. Then you’ll get reimbursed for your costs.
Also look into setting up a Health Savings Account (HSA).
The primary differences between HSAs and FSAs are that an FSA is employer-owned and less flexible; withdrawals are not allowed and contributions cannot be rolled over to the next year, while an HSA is controlled by an individual and is more flexible; withdrawals are allowed with a penalty and contributions can be rolled over to the next year.
These accounts can be a way to reduce your tax burden.
6. Start a college savings plan
Once you have taken care of the more urgent financial matters for your new child, consider starting a college savings plan. It might seem like it’s too early to start thinking about college at this point.
However, just as you benefit from compound interest when you save for retirement over a period of many years, you can receive the same type of benefit from saving for your child’s college education over a long period of time. Some parents begin saving money in 529 plans before they even have children!
The most common plan families use to save for college is a 529 plan, which is a tax-advantaged savings plan designed to encourage saving for future education costs. Legally known as “qualified tuition plans,” 529 plans are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans: education savings plans and prepaid tuition plans. Most education savings plans are available to everyone, but a few have residency requirements for the saver and/or the beneficiary. Prepaid tuition plans typically have residency requirements. One exception is a prepaid tuition plan sponsored by a group of private colleges and universities.
The IRS does not specify annual 529 plan contribution limits. Instead, but each state sets the aggregate limit for 529 accounts. The totals vary but can be as high as $550,000. This means that most families won’t have to worry about hitting their 529 plan’s contribution limit. However, if you exceed the gift tax exclusion in a year, you might trigger a gift tax. Again, consult with your financial advisor to determine the best approach.
However, 529 plans aren’t ideal for everyone. Please work with your financial advisor to determine the type of college savings plan that works best for you and your family.
7. Prepare a will
Having a final will and testament in place is important once you have children. Through your will, you specify guardianship for your child, distribute your assets according to your wishes and minimize the chance of disputes among family members. It will expedite any proceeding legal processes.
Without a will in place when you die, there’s no guarantee that your assets will go to the people you want or that your children will be cared for by the person you believe will do the best job. This is another extremely important way to prepare financially once you become a parent.
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If you are a new parent, congratulations! This is an exciting life transition, and we are here to help you become financially prepared for it. Don’t hesitate to contact us.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy can guarantee your objectives will be met. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Investment products are: Not deposits. Not FDIC Insured. Not guaranteed by the financial institution. Subject to risk. May Lose Value.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement, and should be read carefully before investing.
