Welcoming a new addition to your family is an exciting time. While you have the momentum of preparing your home and your schedule to accommodate your child’s needs, it’s also important to include revisiting your financial documents and goals into your preparations “to do” list.
The impact of a new child extends into every area of your financial life including your taxes, insurance, and estate. You can claim your child as a dependent on your tax return, but you can also deduct childcare expenses, such as daycare costs.
You will also want to consider creating a future plan for your child if something happens to you. This could be an update to your will or trust and an update to your life insurance to ensure your coverage is adequate to secure your child’s future.
It’s never too early to start saving. In fact, you can start a college savings plan before your child is even out of diapers. The cost of education has been rising steadily, so no matter what college your child chooses to attend, the cost will probably be higher than you think. There are different college savings plans available to you. Some even allow you to purchase tuition at the current prices.
One savings plan option is a 529 college savings account which allows you to invest money toward your child’s education without paying taxes on the investment earnings. This means the assets grow tax free and any withdrawals are not taxable as long as they’re used for approved educational purposes.
Remember this: before you contribute to your child’s college savings plan, make sure you prioritize your retirement savings. You can get student loans, but you can’t get a loan for your retirement.
When you work with a financial planner and tax professional, you will be able to ensure that you’re taking advantage of all possible tax deductions and credits related to your growing family. Another dependent allows you to adjust your withholdings and increase your monthly income. You can also use the extra tax savings to contribute toward your retirement or other savings goals. If you’re adopting a child, you may also qualify for the adoption tax credit.
It’s always a good idea to make an estate plan, but you definitely want to do this once you become a parent. You work hard to save and build a legacy for your children, but you have to make sure your estate plan provides for them in the way you intend. Your plan should include an updated will or trust and information about your last wishes. The more decisions you can make with your estate plan, the easier it will be for your heirs. And remember to update your estate plan each time you welcome a new child.