Financial Considerations for New Parents

in Retirement Planning by

The British Royal Family welcomed a Prince this week, and on Tuesday new parents Kate and William brought him home to Kensington Palace. While most young families won’t experience throngs of reporters, locals and tourists waiting outside the hospital or at home, they will have some major financial decisions to make in the months leading up to and following the arrival of a new baby.

The Right Savings Strategy

According to the US Department of Agriculture, the cost raising a child from birth until age 17 is an estimated $295,560, including projected inflation, for middle-income earners. Developing a personalized savings plan is crucial for managing these costs.

“We recommend that you separate savings into at least three different categories,” says Craig Birk, Vice President of Portfolio Management for Personal Capital. “First, make sure you have enough savings for three to six months of living expenses, or more if your income is unstable. Your own retirement savings is the next priority. Then factor in a college fund.”

A good college savings strategy is a 529 plan. There are many 529s available on the market today, so be sure to look at dollar requirements and investment options for each plan and talk to your financial advisor if you’re not sure about which offering best aligns with your overall strategy. Investments in a 529 grow tax free, and distributions from the account are also tax-free if used specifically for education-related expenses. A number of states also offer income tax deductions on the 529.

Life Insurance and Health Care Plans

Before shopping for life insurance, first calculate how much you need to purchase based on living expenses and child-care costs, from mortgage payments to education. Then consider which type of insurance is most appropriate.

“Term life insurance offers coverage for a specified period of time,” says Birk. “You may want to opt for a 20-year policy so the death benefit is available until the child leaves home. The other option is a whole life policy, which is more expensive but builds cash value over time. Term is more appropriate for most new parents.”

Health care coverage is also a major consideration for new parents. It’s important to understand the benefits offered even before a visit to the delivery room. For example, does the plan cover neo-natal screenings, emergency procedures and delivery? What about pediatric care after the baby arrives? Once the baby is born, there’s usually a deadline associated with adding him or her to your policy. Make sure you’re aware of these requirements beforehand.

Tax Considerations

For a child born in 2013, you can claim a dependent exemption of $3,900. If your income is $110,000 for married couples filing jointly (or $55,000 for married couples filing separately), you may qualify for the $1,000 Child Tax Credit.

If both parents plan to work, you may be able to claim child care credit. Child care costs up to $3,000 for one child, or $6,000 for two or more children, may qualify, depending on your adjusted gross income.

Qualifying expenses for the Child and Dependent Care Credit may be reduced according to any childcare benefits supplied by an employer. Some employers offer a Dependent Care Benefit program, which allows an individual to contribute up to $5,000 per year, tax-free.

Will and Beneficiaries

If you don’t have a will, now is the time to create one. The first consideration is designating a guardian in the event that something happens to you and your spouse.

“You should also compile a complete list of your assets, financial accounts, credit cards, investments and debt that will be easily accessible to the surviving spouse, family member, or trustee.” says Birk. “This will make it easier to locate and distribute assets according to your wishes should something happen to you.”

Even if you already have a will, you’ll want to review beneficiaries on any retirement and life insurance accounts.

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