5 Financial Planning Tips for Welcoming a Baby

1. Start planning for your first-year expenses.

• Caring for a new baby can be expensive. From setting up a nursery, purchasing a car seat and stroller, feeding costs, diaper duty and other necessities, there are many first-year cash flow considerations you must incorporate into your overall budget. I suggest using a Baby Budget Calculator to estimate your expenditures.
• Unfortunately, emergencies happen. It’s wise to build up a backup fund in case of an unexpected event. A good rule of thumb is to have three months of non-discretionary expenses set aside in a two-income household and six months of expenses in a single income household.
• Review your maternity and paternity leave options. What are your choices to take leave and how does this impact the cash flow of the family? Are you eligible for a government-provided parental leave or benefits if your employer does not offer them?
• From babysitters, nannies and day care costs to preschool and educational fees, there is a wide range of childcare expenditures. Determine your options and what the expenses are related to each.
• Review the options and benefits through your workplace. Through a flexible spending account such as a dependent care flexible spending account (DCFSA), you can set aside up to $5,000 per year tax free for eligible childcare expenses, such as an after-school program. For more information on what is included, visit the IRS website.

2. Review your insurance coverage.

• Prenatal care, visits to the doctor and out-of-pocket health insurance costs can add up quickly. To be better prepared, check with your insurance provider. Many will give you an estimate of the total cost of routine care.
• Typically, you have 30 days following the birth or adoption of a child to add them to your health care plan at work. If both spouses are working, review coverage options with each employer and determine which provides the most cost-effective, comprehensive services.
• Take advantage of tax-free programs by opening a health savings plan (HSA) or flexible spending account (FSA). They can save you a lot of money on health care products you use every day.
• Review your life insurance coverage. Have your needs and goals changed since your new addition to the family arrived, and do you need to update your policy?
• Consider if you need additional disability coverage in place.

3. Take advantage of tax considerations.

To ensure you are as tax efficient as possible, it’s best to partner with your accountant or tax professional. Here are some general things to consider:

• Don’t forget to update your withholdings at work and claim your child as a dependent.
• The child and dependent care credit provides up to $2,000 per qualifying minor under the age of 17. The credit amount decreases if your modified adjusted gross income exceeds $400,000 filing jointly or $200,000 for single taxpayers.
• A provision in the Secure Act 2.0 allows parents to withdraw up to $5,000 penalty free from retirement accounts within a year of birth or adoption for qualified expenses.
• The Child Tax Credit reduces taxes due on a dollar-for-dollar basis. For 2023, the credit provided the maximum of $2,000 per qualifying dependent child under age five and $3,000 for children ages 6 to 17. To qualify, income thresholds are $200,000 for single filers and $400,000 for joint filers.

4. Evaluate your estate documents.

• Update and share your legal and financial documents, including powers of attorney, health care powers of attorney, wills and trusts.
• Decide who will be named in your documents as your child’s guardian. While this may be difficult, determining who would be a good fit and having a conversation with them is an important part of the estate planning process.
• With the direction of your estate planning attorney, you will want to update the beneficiary designations on your accounts and insurance to include your new child.

5. Set savings goals for your child’s future.

• Determine how you want to handle your child’s cash gifts and how you will fund future savings goals for them.
• Consider if a custodial account such as the Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Account (UGTA) is a tax-efficient strategy for savings outside of future education expenses. If you want to start saving birthday money or cash gifts for your children, a UTMA account can be a great place to invest the funds for the future. Your child will have flexibility on how they spend the funds, including big purchases such as a downpayment on a home or a new vehicle.
• Now is the perfect time to begin saving for higher education. A 529 plan is a tax-efficient way to pay for qualified K-12, college or apprenticeship expenses.
• It can be easy to lose sight of your own personal retirement and savings objectives. While you may borrow money to pay for your child’s education, make sure your goals are still on track for retirement.

Plan, review and modify

It takes time to adjust to a new member of the family and that goes for the financial side of the equation as well. Be sure to revisit your family’s financial plan and needs with your advisor as your goals and priorities change. If you are not currently working with one, we would love to help you. Please schedule a short phone call or virtual conversation with our Client Development team.

For educational and informational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-24-6677