A special blog post for new (and experienced!) parents on planning for your child's financial future by Brittany Fisher of financiallywell.info. Brittany worked for more than two decades as a Certified Public Accountant (CPA) and is in the process of writing her first book! In this post, Brittany shares some important financial planning tips, including saving for that emergency fund. Thanks Brittany for sharing your knowledge with us!
"When you become a parent, there are so many things to consider: pediatrician, diapers, swing, crib, car seat, stroller, child care, general safety, and so on. But, one other area of consideration that new parents should take into account is planning for their child’s future. One of the best things new parents can do for their child is to plan ahead for financial security.
Prepare for emergencies
While you can’t stop bad things from happening, you can prepare yourself financially for the unexpected. You should have at least six months’ worth of living expenses put aside before you start funnelling large sums into your child’s college account. This will keep you afloat in case you lose your job, which, as a parent, is a real emergency. Invest in whole life insurance. This may cost more each month but whole life products can be converted to cash if you need it and won’t expire or experience rate increases with time. Nerdwallet offers this life insurance calculator to help you determine how much you need. Working a temporary second job and cutting unnecessary expenses are practical ways to build your emergency fund.
Start Thinking about College Tuition Costs Now
College tuition will be much more expensive in 18 years than it is now so start saving when your child is born. It’s a good idea to open a savings account with some or all of the money you receive from friends and family at baby showers, in cards, etc. Because the money is intended for the child, you should ensure it goes to him by starting a college savings plan or other savings account with it. The trick is to choose the right sort of account so that your child does not miss out on financial aid or owe taxes when he enrolls in college.
In most cases, colleges determine financial aid based on income and assets from the student’s junior year in high school, so students with large savings accounts in their names frequently lose sizable amounts of financial aid. The three best ways to save, therefore are 529 college plans, UGMA and UTMA accounts, and Roth IRAs.
- 529 College Savings Plans - Like a traditional IRA and 401(k) plan, 529 college plans give parents a vehicle for saving for their child’s education in a tax-free way with several investment options. Parents may choose aggressive investments when their children are young and then switch investments to more conservative options when the child is nearly college age. Gains on 529 college savings plans are tax-deferred, so when the funds are used to pay for appropriate tuition expenses, parents don’t pay taxes on the funds. Keep in mind that 529 plans belong to parents and may be used for undergraduate or graduate studies at any accredited two-year or four-year program in the United States.
- UGMA and UTMA Accounts - In the case of the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA), the first $1,000 in gains is tax-free, the second $1,000 is taxed at the child’s income tax rate, and the remaining portion is taxed at the parent’s income tax rate. These savings accounts don’t have any restrictions on how the funds are used, as long as they directly benefit the child.
- Roth IRAs - One final option is opening a Roth IRA in the child’s name. Kids over the age of 18 gain control of the account, but money cannot be taken out of the account without penalty until the age of 59.5 years. Exceptions allow for early withdrawals for qualified education expenses or hardships due to disability.
Get Your Affairs in Order
Once you have a child, you need to make sure that your own financial and property affairs are in order. Ensure you live in a home and neighborhood where your child can grow and thrive. Take steps to protect them financially by paying down your debt and drawing up a will that includes designating a guardian for your child in the event of your death. A lawyer can help you determine what to include in the will and choose an executor that will make sure your final wishes are carried out as you wanted them to be.
Seek Professional Advice When You Need It
Of course, banks and financial advisors are great resources for new parents trying to determine the best ways to secure their child’s future. Lawyers also can help with drawing up wills and creating other legal documents to make sure your children get the inheritance you wish them to have.
It’s never too early to start securing your child’s future. New parents should decide which savings avenue to pursue, get their affairs in order, and seek professional advice as needed to make sure they are setting up their child for success."
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