New Baby! Financial Checklist

Aug 2

Congratulations on the new baby in your life! Whether you’re a soon-to-be new parent or expanding your family through adoption or birth of a new child, here’s a financial checklist to help curb your worries and prepare for your growing family’s financial future.

1. REVISE YOUR HOUSEHOLD BUDGET.

According to babycenter.com, your baby’s first year may cost you around $15,000[i], so it’s important to adjust your monthly budget and incorporate new expenses like diapers and formula. When revising your budget, be sure to consider the entire first year of expenses. This could include out-of-pocket medical costs related to doctor visits and birth recovery, as well as any larger one-time expenses like a car seat or crib.

Childcare expenses should also be taken into consideration.

The good news is you will likely be able to cut expenses in other areas. Throughout your baby’s first year, you may experience a reduction in your own personal discretionary spending on expenses like going out to dinner, attending concerts, and traveling. Going through the exercise of revising your budget provides an opportunity to look for unnecessary expenditures on autopay. Now is a good time to review those standing subscriptions like streaming services you no longer use and cancel the “box-a-month” subscriptions of unwanted beauty products and clothing that tend to end up in the donation pile.

Don’t stress out making “budget” a bad word. Consider instead, that you are simply prioritizing where to spend your resources.

2. UNDERSTAND THE IMPACT TO TAXES.

The arrival of your new baby comes with several potential tax breaks to take advantage of, but your baby will first need a social security number to qualify. Review your situation with your CPA or tax attorney to understand which credits and deductions apply to you.

Child Tax Credit reduces your taxes due on a dollar-for-dollar basis. For the 2023 tax year, the credit provides a maximum of $2,000 per qualifying dependent child under age 5 and $3,000 for children ages 6-17. To qualify, the 2023 income threshold is $200,000 for single taxpayers and heads of household ($400,000 for joint filers)[ii].

Child and Dependent Care Credit can help offset the costs associated with caring for a child or dependent with disabilities. Depending on your income and qualifications of the dependent, the Child and Dependent Care Credit can cover 20% to 35% of eligible expenses.

· SECURE Act 1.0 created an allowance for some employer-sponsored retirement plans to add an option for employees to take a distribution to pay for qualified expenses relating to the birth or adoption of a child. Be aware of payback periods. SECURE Act 2.0 requires that birth or adoption distributions must be repaid to the plan within three years. (For qualified distributions taken prior to December 29, 2022, if the plan participant wishes to repay the distribution, the repayment must be made before January 1, 2026.)

· Review your payroll tax withholding and employer benefits. File an updated W-4 with your employer to adjust tax withholding if necessary. Having a new baby is often a qualifying event to enroll in new employer benefits or update your existing coverage. For example, you may want to take advantage of a Flex Spending Account, which can be a tax-advantaged way to cover daycare expenses.

3. REVIEW INSURANCE COVERAGE

For employer-sponsored health insurance, contact your HR department and find out the steps to add your new baby’s name to your policy. If both parents are covered under separate health insurance policies, the coordination of benefits (COB) may be necessary to understand the prioritization of filing claims. Ask your HR contact about the birthday rule! Pro-tip: If a new benefits card is provided, make sure you update the records with your OB, pediatrician, and other care providers.

Evaluate your home and auto insurance policies. Unless you are buying a new family car or putting an addition on your home to accommodate for baby, your insurance premium rates will likely not change just because you expanded your family. However, it is a good time to review your liability and out-of-pocket deductions to ensure you are budgeted accordingly to cover emergency expenses and liability risk. Don’t let unplanned storm damage or a playdate mishap catch you unprepared.

4. ESTABLISH A COLLEGE SAVINGS ACCOUNT

According to savingforcollege.com, a 4-year in-state public college education starting in 2040 will cost approximately $115,506 for a family with a household income of $100,000.[iii] Here are a few options to consider as you start saving for baby’s college and education needs.

529 Plans are state sponsored tax-advantaged accounts designed to be used for education. Funds in the account grow tax-free, and as long as the money is used for qualified expenses (generally tuition, room and board, and certain supplies) the withdrawals are also tax-free. Many states offer state tax credits for a portion of your annual contribution and some states even offer Prepaid Plans locking in the cost of tuition in today’s dollars.
A Coverdell Education Savings Account (ESA), formerly Education IRA, can be established for beneficiaries under the age of 18 or a beneficiary with special needs. Contributions into an ESA are limited to $2,000/year and must be used by the time the beneficiary is age 30 or taxes, fees, and penalties could apply to withdrawals.[iv]
UGMA/UTMA accounts (Uniform Gifts to Minors Act/Uniform Transfer to Minors Act) are custodial accounts and effectively serve as irrevocable trusts that hold assets until the beneficiary reaches the age of majority. These accounts provide flexibility in that they are not subject to contribution deadlines and the funds are not required to be used for college expenses. A few things to be aware of with UGMA/UTMA accounts include assets may impact the child’s eligibility for college financial aid, earnings do not grow tax-deferred, and gift tax contribution limits do apply.

5. PREPARE YOUR WILL AND ESTATE PLAN

A new baby changes everything, including your estate planning needs. If you die without a will, your estate will likely go to probate and the court will determine who will care for your child and receive your assets.

Update your will or trust to incorporate your new child (or grandchild).

Name a guardian and a trustee. This is one of the most important parts of your estate plan when you have a minor child. The guardian will raise your child if she becomes an orphan or if the child’s other parent does not have full custody. The trustee will handle your child’s finances and help distribute your assets according to your wishes. You will be able to change the name of the guardian or trustee at any time if you have a will or revocable trust.

Review your life insurance coverage and beneficiaries. With the rising cost of raising a child, as covered earlier, you may find your life insurance coverage to be inadequate in the unfortunate event you are no longer there to provide for your family. When updating beneficiaries, keep in mind that in some states, the life insurance company may be required to hold the proceeds until your beneficiary reaches the age of majority. You may consider establishing a trust or naming a trusted adult as beneficiary to oversee assets on behalf of your minor child.

Pro tip: Ask this essential question, “What happens to my family if something happens to me?”

Take steps now to have peace of mind with your financial goals and provide protection for your family from the unexpected.

[i] https://www.babycenter.com/baby-cost-calculator

[ii] https://www.irs.gov/credits-deductions/individuals/child-tax-credit

[iii] 529 College Savings Calculator - Saving for College

[iv] About Publication 970, Tax Benefits for Education | Internal Revenue Service (irs.gov)