One of my oldest and best friends had his first child last week (a boy, everyone is healthy and doing great). He is the first of my closest friends to reach this milestone. While it is a bit surreal to think of this young man as a father, he and his wife are certainly ready to be parents – both are successful professionals, they are homeowners, the nursery is set up, etc., etc.
Like most young parents, however, they still have room for improvement in their long-term planning. Long-term planning should extend beyond simply saving for retirement; it must also include thoughtful consideration of other important matters, including:
1. Obtain Wills for Both Parents
Choosing a guardian for your child is the first thing new parents should do. But please keep in mind: unless your decision is in writing, it is not likely to hold up in court. In other words, if you do not have a will, a Judge will decide who raises your child. New parents should also specify where their money should go. Many parents assume that their savings will automatically go to their spouse if something should happen. In many cases, however, half of the money would automatically be put into a trust for the child. In order to retrieve the money, the surviving spouse would have to petition the court, which can be a complicated process.
2. Pay Off Existing Debt and Keep Saving For Retirement
New parents must set a budget and actually live by it. One easy way to help ensure you actually live by your budget is to set up automatic payments for your monthly expenses. This can be done for just about every household expense. Part of your budget should include actively paying off credit card debt and trying not to incur more. Further, as a general rule of thumb: 10 to 15 percent of your income should go into your 401(k) plan or IRA. Only after you have set aside that money should you begin to save for your child’s college tuition.
3. Open a College Savings Plan for Your Child
Most states sponsor what is commonly known as a “Section 529 Plan.” These plans are a great way for parents to save for college and, in most states, a tax deduction is allowed for annual contributions to the plan. In New York State, married couples that file joint tax returns can take up to a $10,000 deduction for contributions to a Section 529 Plan.
4. Re-evaluate your Insurance Needs
Life Insurance – As soon as your first child is born, your life insurance needs dramatically increase. For this reason, among others, your needs should be reviewed by a competent financial planner. There are many options available (e.g. permanent and term policies), which can be tailored to meet your needs, as well as your resources.
Disability Insurance – One in three American adults will become disabled for 90 days or more before reaching the age of 65. Disability insurance will help cover the loss of income. Many employers offer it, but make sure the policy is enough for you and your family.
5. Consider Dependent Care Flexible Spending Accounts; the “Cafeteria Plan”
Many employers offer a Section 125 Plan, which allows employees to pay for medical expenses and childcare expenses pre-tax. Different plans have different rules, so make sure the plan is appropriate for your situation.
6. Choose a Quality School System
When searching for your first (or next) home, look in an area with quality public schools. The property taxes may be higher, but this is a good investment in the future value of your home and it will help you avoid the need for private schools.
7. Consider the following Tax Matters
Paycheck Withholding – Once your child is born, you should update your W-4 (the Employee’s Withholding Certificate), to reflect your additional dependent. Doing so will increase the amount you receive from each paycheck.
Social Security Number – You will need a Social Security Number for your child in order to take advantage of available tax savings opportunities. A Social Security Number is also required to open a bank or investment account for your child. The easiest way to apply for your child’s Social Security Number is at the hospital. When you supply the information for your child’s birth certificate, tell the hospital representative that you would also like to apply for a Social Security Number for your child. The hospital will send the required information to the Social Security Administration and your child’s new card will be sent to you in the mail.
Tax Exemption – You can claim an exemption on your tax return for each dependent child. For 2011, the dependent exemption is $3,700. You may also qualify for a child tax credit of up to $1,000. Both the dependent exemption and the child tax credit start to phase out when your income exceeds certain levels. If you return to work and require childcare, you may be eligible for the dependent care tax credit as well.