Financial “Baby Steps” When Planning to Start a Family

After all, if you are a new parent, you probably already would expect to be up all night tending to a crying newborn. You shouldn’t also be kept awake by worries of a financial nightmare.

PUT FAMILY ON FIRM FOOTING

When you’re expecting, some preparations come to mind: preparing the baby’s room, picking a stroller and car seat, or perhaps shopping for a larger vehicle. You’ve likely also tackled other basics, such as working up a budget, adding life insurance, and paying down debt. Those items are a good start, but there are still other elements to juggle.

• Update Your Health Care Plan
• Health Savings Account
• Flexible Spending Account
• FSA for Child Care Expenses
• Child Tax Credit
• Reassess Your Retirement Contributions

You’ll also want to consider how to distribute your hard-earned assets through an estate plan.

• Will or Revocable Trust with Pour-Over Will
• Durable Power of Attorney and Living Will
• Estate Planning Letter of Intent
• Estate Tax Obligations
• Update Beneficiaries

MAXIMIZE CAREER EARNINGS AND GROWTH POTENTIAL

When we hear the phrase “career earnings,” we may think only about how much a job pays. But a wider view is increasing the bottom line by taking advantage of pre-tax benefits or tax credits, especially when having or adopting a baby qualifies you for new programs. Some options for doing so are:

Update Your Health Care Plan

Having or adopting a baby is a qualifying life event, which enables you and your spouse or partner to change your health plan elections. Typically, most plans require that you add a new child to a plan within 30 to 60 days after the event. If done in the time frame appropriate for your policy, your child should be covered retroactively.

If you and your spouse or partner have employer-sponsored options available to you, choose the one offering the most coverage for the least out-of-pocket expense. You may not want a high-deductible, low premium plan in your baby’s first year because of the potential for complications and unexpected office visits. However, coupling a high deductible with a Health Savings Account can offer tax advantages.

Health Savings Account (HSA)

A Health Savings Account is available only to those purchasing a qualifying high-deductible health plan. Contributions are considered “above-the-line” (deducted from adjusted gross income). For 2024, you may contribute $4,150 for individual coverage and $8,300 for family coverage. Anyone 55 or older can contribute an additional $1,000. When you fund your HSA, you may have the option to also invest those funds, with gains/losses impacting the balance. Any money left in your HSA at the end of the year will roll over to the next year.

HSAs have several tax advantages: contributions are pre-tax, all interest earned from investments is tax deferred, and distributions are not taxed so long as they are used to pay for qualified medical expenses.

Flexible Spending Account

A Flexible Spending Account for health care services may be offered by employers and is funded through employer contributions or employee pre-tax payroll contributions. For 2024, employed spouses may each contribute up to $3,200, of which $640 may be carried over to the following year if the employer plan permits. Otherwise, any remaining funds may be forfeited.

FSA for Child Care Expenses

An FSA also can be used for services such as nannies, daycare, preschool, and before or after school programs for children up to age 13.

One such option is a Dependent Care Flexible Spending Account (DC FSA), funded from a pre-tax payroll deduction. The contribution limit for 2024 is a combined $5,000/year for single filers or for married couples filing jointly ($2,500 if married but filing separately). Expenses reimbursed through a funded Dependent Care FSA cannot be claimed again as a Child and Dependent Care Tax Credit, which effectively reimburses up to $3,000 for one child or $6,000 for multiple children in eligible childcare expenses.

Child Tax Credit

The Child Tax Credit is available to parents for each qualifying dependent child under the age of 17 and reflects that families with children will likely have more expenses. It is separate from the Child and Dependent Care Tax Credit.

Families may be eligible for a tax credit of $2,000 per qualifying child.

A family adopting a child can claim the Adoption Tax Credit, which amounts to a maximum of $16,810 per child for 2024. Also explore whether your employer offers parental leave after a birth or adoption.

Reassess Your Retirement Contributions (Traditional vs. Roth)

There can be trade-offs among contributions to a traditional Individual Retirement Account (IRA) or 401(k) and a Roth IRA or 401(k). IRAs generally offer more investment options, while the potential employer match of employee contributions to a 401(k) can be considered free money. If your income is low today but you expect it to grow, a Roth option may be beneficial. If your income is high today, you may want to examine the pre-tax treatment of traditional options.