Financial Guide for Parents of New Children
Babies are expensive. Really expensive. According to the U.S. Department of Agriculture, it costs about $234,000 to raise a child from birth through age 17. That figure does not include the cost of college, which will cost about the same amount for a child born this year. There are several financial steps you should take to cover the cost of a new baby and plan for the child’s future.
Financial Moves Before Birth or Adoption
Plan for your new baby by reviewing your budget. Are there any areas where you can save money? Are there any new expenses you need to consider? How does the new addition affect your long-term financial goals?
Research the financial cost of maternity and paternity leave. The Family and Medical Leave Act (FMLA) provides parents with 12 weeks of unpaid leave for birth or adoption. But, some employers and states provide new parents with paid time off. Otherwise, you will need to save three months’ salary in advance.
Ask your employer if they provide adoption assistance and pre-tax childcare assistance. Consider the impact of a stay-at-home parent on your cash flow. You will avoid the need to pay for childcare, but you will lose the supplemental income of a two-income household.
Build an emergency fund with half a year’s salary, to cover unexpected expenses or unemployment. Now that you have more people depending on you, you need to plan for all contingencies.
Start saving for college ASAP. The sooner you start, the more time there’ll be for the earnings to compound.
Use an age-based asset allocation within a 529 college savings plan.
Consider both your own state’s plan, if it offers a state income tax break, and low-fee 529 plans in other states.
Aim to save about a third of future college costs, or about the full cost of a college education the year the child was born. This works out to be about $250 a month from birth for a child who will enroll in an in-state 4-year public college. $450 a month for a child who will enroll in an out-of-state 4-year public college and about $550 a month for a child who will enroll in a 4-year private college
If you expect to send your child to a private elementary or secondary school, save for those costs in a separate 529 college savings plan or a Coverdell education savings account.
Hospital costs can range from $8,000 to $10,000 with insurance and $14,000 to $18,000 without, according to FAIR Health. Adoption is even more expensive, given the cost of an adoption agency, home study, attorney and medical and travel costs.
Budget for other expenses, including:
A crib or bassinet, although a cardboard box will do in a jiffy. Amazon’s 3A1 and Q2 shipping boxes should be about the right size.
A baby changing table, if you don’t want to use your kitchen table.
A car seat is a must. This is the one item you must buy new, as used car seats aren’t necessarily safe.
A stroller. A good quality stroller, like the Kolcraft Cloud Plus, is not too expensive.
Diapers and formula can really add up
Financial Moves Soon After Birth or Adoption
First things first, get your child’s birth certificate from the hospital. If you adopted your child internationally, you may need to readopt the child locally, depending on the state. Then file Form N-600, the application for a certificate of citizenship. Even though a child adopted by U.S. parents automatically acquires citizenship because of the Child Citizenship Act of 2000, you will save yourself and your baby a lot of headaches by applying for a certificate of citizenship. Do this before applying for a Social Security Card, so that the baby’s citizenship status will be associated with the baby’s Social Security Number. Then get your child a Social Security Number (SSN) by filing Form SS-5 with the Social Security Administration. Some hospitals will fill out the paperwork for you. Add the child to your health insurance policy. You do not and should not wait for the open enrollment period. You have 60 days to add the child to your health insurance after birth or adoption. Get a term life insurance policy, if you don’t already have life insurance. Choose a term that is long enough to cover your children and spouse until normal retirement age, or at least until college graduation. Add your spouse as the primary beneficiary and your children (including the new baby) as contingent beneficiaries. Also update the beneficiaries on your 401(k), IRA and other retirement plans to include the new baby. Update your will to include the new child. Be sure to appoint a guardian for your child in case something were to happen to you and your spouse. The Fabric app can help you draft a will for free. You can take a distribution of up to $5,000 from your IRA or 401(k), penalty-free, within one year after the birth or adoption of a child. The distribution is still subject to income taxes. Each parent can use this special exemption, if they have separate retirement accounts. Claim the Adoption Tax Credit, if eligible. The adoption tax credit is subject to income phaseouts and the AMT, but it is worth up to about $14,000.
Ongoing Financial Moves
Claim the various child tax breaks, as appropriate. These include the Child Tax Credit and the Child and Dependent Care Tax Credit. The Child Tax Credit is worth up to $2,000 per child if your modified adjusted gross income is below $200,000 (single) or $400,000 (married filing jointly). The Child and Dependent Care Tax Credit is worth up to $1,050 for one child and $2,100 for two or more children, if you needed to pay for childcare so that you and your spouse can work.
The Kiddie Tax provides special rules for taxing a child’s unearned income. The first $1,100 in a child’s unearned income (2019 and 2020 tax returns) is tax-free and the second $1,100 is taxed at the child’s income tax rate. Anything above $2,200 is taxed at the parent’s rate. So, some parents will move assets that pay interest and dividends into the child’s name to save on taxes. But, this can backfire when the child enrolls in college and applies for financial aid, since child assets are assessed much more harshly than parent assets on financial aid application forms. Ask your employer to adjust the tax withholding from your paycheck. Ask your employer about employer-paid childcare subsidies and dependent care flexible spending accounts. Flex spending accounts can be used to pay for qualified childcare expenses using before-tax dollars.
Source: Kantrowitz, Mark. “Financial Guide for Parents of New Children” www.savingsforcollege.com, March 6, 2020