Five Considerations for New or Expecting Parents
Out of all of life’s changes, having a baby can be the most rewarding, and also the most impactful to your future. Call it a cliché, but it’s the truth: everything changes with kids. There are infinite “how-to” and “ what to expect” books on parenting, which can provide helpful advice on how to care for your child. However, what most do not include is how to ensure your growing family is prepared financially. No matter what stage of parenthood you are in, it’s never too late to start planning. Below we touch on five of our most commonly discussed strategies.
Adjusting to Cash-Flow
The arrival of your child will inherently lead to a change in expenses. Cash-flow is a priority for most, and while some expenses may increase (health insurance, groceries, childcare), others may decrease (dining out, travel). As you adjust to these changes, it’s important to revisit what a comfortable level of savings means to you.
Seemingly overnight, your future obligations increase. If something were to happen to you or your spouse, would the other be able to care for your family while covering a mortgage, daycare costs, private school/college, etc.? There are several factors that determine the appropriate level of coverage for life and/or disability insurance, and an insurance analysis can help uncover gaps in coverage by bringing those factors into play.
Perhaps the most important aspect to review is your estate plan. This is not just for high net worth individuals, everyone should have some form of estate plan. Establishing a last will and testament isn’t the most exciting thing to think about, especially during such a happy time, but it is incredibly important. It allows you to appoint a guardian in the event of tragedy, detail how your assets should be distributed, choose an executor and Power of Attorney, and update contingent beneficiaries.
Contributions to HSA
Doctor visits are an inevitable part of raising children. Medical care is expensive, and children like to get sick. Depending on your health insurance plan, you may be eligible for a Health Savings Account. This can be a great tool for setting aside money for future medical expenses. A few key features:
Contributions are tax-deductible.
The balance rolls over (does not have to be used by year-end).
Earnings grow tax-deferred (if invested).
The funds can be withdrawn tax free for qualified medical expenses. It’s one of the few accounts that has a triple-tax advantage.
For 2023, contribution limits are $3,850 for a single person or $7,750 for families.
Public school or private school? College? Scholarships? Trade School? It’s difficult to know what the future holds for your child’s education. Fortunately, there are options that make it easy to save, even when the future is unknown. One option often utilized is a 529 Plan. A few key features:
Contributions are made on an after tax basis, but the earnings grow tax-deferred.
Similar to HSA funds, upon withdrawal for qualified education expenses, the funds are not taxed.
529 plans can be used for college, trade school, graduate school, private primary or secondary schools (up to $10k/yr) and more.
The beneficiary can be changed to another child/student if the current beneficiary no longer has a need for the funds.
Starting in 2024, up to $35,000 in unused funds can be rolled into a Roth IRA for that child. In the event of over-funding the 529 (due to a scholarship for example), this provides a great opportunity to set your child up for the future.
One last benefit is that anyone can contribute to your child’s 529 plan: parents, grandparents, friends, anyone!