Whether you're a first time parent or a seasoned pro, there's always something new to discover. Having children teaches us that there will often be an element of the unexpected in life, but when you set your family up to handle those surprises, you're more likely to enjoy the perks of being a parent. They will throw plenty at you, so be prepared!
Many looming questions will inevitably arise when bringing a child into the world and transitioning into parenthood. How much will it cost to deliver the baby, or how much will it cost to stay in the hospital if a C-section is needed? Once the baby arrives, how much will I need to spend on baby clothes, food, and diapers? And the questions do not end there…
As the child grows older, there will, of course, be many more expenses that will likely grow in scope and price. For example, how do you save enough to cover daycare services, or how do you decide if a private school is in your budget? There are many questions to ponder—all the way through helping your kid(s) with college!
This is why we have created a benchmarking guide detailing the average costs associated with parenthood, which in turn will help parents better budget their household expenses.
CONSIDER A FLEXIBLE SPENDING ACCOUNT (FSA)
IF IT IS AVAILABLE:
Advantages
FSAs allow you to contribute pre-tax money from your paychecks and pay for medical expenses or dependent care. In addition, the full amount you intend to contribute over the year is available for your use immediately even if the year is not over.
Disadvantages
You are required to spend what you put into the account within the “Benefit Period” (January 1st and ends March 15th of the following year) or lose the money you put in.
To determine the appropriate amount of coverage, ask yourself these questions:
What are my financial goals and obligations (i.e. mortgage college education, etc.)?
What financial resources are currently available?
In the event that you die, what will be the impact on your family’s financial position? Any gaps?
529 Investment Savings Plan:
Proceeds can be used toward qualified educational expenses including tuition, room & board, and books
Funded with after-tax dollars that grow tax deferred
Growth can be withdrawn tax-free when used for qualified education expenses
Ability to reassign beneficiary
Anyone can contribute
10% IRS penalty applies on growth withdrawn if not used for qualified education expenses
529 Pre-paid Tuition Plan:
This option allows you to “lock in” tuition costs today and avoid the annual tuition increases, which, according to the College Board, are growing at an average of 5% per year
UTMA/ UGMA Custodial Accounts:
Parents maintain control of assets until child reaches age of majority (18), but the child is the owner of the funds
Once child reaches 18 they have sole control of the money
Risk if not using the funds for college
Earnings taxed at child’s lower income tax rate
Kiddie tax is a potential unintended consequence
Capital gains and dividends taxed
Non-education spending is not subject to the 10% IRS penalty like 529 plans
Dual Purpose Savings Strategies:
Roth IRA
Good supplemental alternative, especially if other accounts are on target to satisfy retirement goals
Contributions can be withdrawn at any point without paying taxes or penalties
Earning grow tax deferred and can be withdrawn tax-free after 59 1/2
Brokerage account
After tax investments
Bonds subject to income tax
Stocks and equity funds subject to capital gains and dividends tax rates
Better flexibility
Funds can be earmarked for multiple purposes
Can repurpose the money without being “boxed in” (example: College scholarship reduces the need to fund education expenses)
Coverdell ESA:
Income limits apply to who is eligible to contribute
Contributions limited to $2,000 per year per beneficiary
Assets must be withdrawn by the time the student reaches age 30
Series EE Bonds:
Earnings avoid income taxation if bondholder made purchase after age 24, and income is at or below phase-out range
