15 Key Things to Consider When Having or Adopting a Child
The COVID-19 pandemic will likely lead to a large, lasting baby bust. The reduction in births could be 300,000 to 500,000 for 2021. Similarly, adoption rates, normally 9,000 a month, are also expected to reduce especially with the social distancing and travel restrictions.
This trend is temporary, and none of this detracts from the fact that having a child is one of life’s wonders and probably one of the most profound changes to a household. It’s not a simple thing to raise children, as they say - “it takes a village to raise a child”.
Some of the common concerns I hear from new parents are -
“What do we need to be doing now for my child’s future?”
“How can we best manage the impact on my work and career?”
“How best to split the new responsibilities and income-earning with my partner?”
“Should we skip saving for retirement and save for college?”
I decided to create a checklist for a client that adopted a beautiful baby girl in Alaska last November. My checklist is focused on the short-term actions and considerations for new parents, and the recourses that are available to them. Forewarned is forearmed and getting your growing household in order will bring peace of mind.
Here are 15 Key Things to Consider When Having or Adopting a Child
1. Adding your child to your health insurance policy
a. Most health insurance plans require that your child is added within 30 or 60 days post-delivery. If done in that time frame, your child should be covered from day one!
b. Be sure to find a doctor or pediatrician in your insurance network.
2. Health Savings Account - HSA
If you meet the eligibility requirements you can open an HSA which has an annual pre-tax contribution limit of $7,200 for families in 2021 and represents a tax-free source of funds. Your HSA account can be used for a wide variety of medical expenses for the family members including, co-pays, infant formula, and breast pumps. See https://www.irs.gov/publications/p969 for full details. Importantly this account can accumulate.
3. Consider participating in a Flexible Spending Account - FSA
If you do not have access to an HSA, your employer may provide you with access to an FSA. However, unlike an HAS account, an FSA is use-it-or-lose-it, which means that your contributions do not accumulate each year and must be spent in that year. In this case, be sure to accurately budget for your family medical expenses.
4. Does your employer offer a Dependent Care Flexible Spending Account and family benefit?
a. Most If so, consider making contributions to the account. The account can be used to pay for qualified childcare expenses.
b. Check to see if your employer offers any benefits to families such as childcare subsidies, or maternity/paternity leave
5. It’s time for you to review life insurance and disability coverage.
a. Consider increasing the amount of life insurance coverage you need to fund future child-related expenses such as college costs, childcare, along with mortgage payments. b. Disability insurance offers coverage in the event that you become sick or injured and cannot work. If it is provided by your employer the insurance benefits are included in taxable income, however, if you fund it directly the benefits will be tax-free, which will reduce the total coverage you need.
6. Will you and/or your partner take maternity/paternity leave?
If so, consider how this will impact your cash flow, budget, and savings.
7. Do you want your partner (or yourself) to stay home to raise children?
If so, consider the following:
a. The impact on your cash flow, budget, and savings.
b. The impact on your emergency fund due to living on one income (it will need to be greater than if you are both working).
c. The possible impact on employer benefits such as health and life insurance.
8. Do both you and your partner expect to return to work?
If so, consider the cost of daycare or a nanny and the impact on your household budget and savings.
9. Is your Modified Adjusted Gross Income (MAGI) below $200,000 (Single) or $400,000 (MFJ)?
If so, you may qualify for the Child Tax Credit. The credit is worth up to $2,000 per qualifying child. Do you have child or dependent care expenses that were required in order for you and your partner (if applicable) to work or search for work? If so, you may be eligible for the Child and Dependent Care Tax Credit, which is worth up to a maximum of $1,050 for one qualifying child and $2,100 for two or more qualifying children (subject to restrictions). Seek advice from your tax preparer.
10. Did you adopt a child, and is your MAGI below $254,520?
If so, you may be eligible for the Adoption Tax Credit, which is worth up to $14,300 for 2020 and $14,440 for 2021 (subject to phase-out restrictions).
11. Do you need to update how much is withheld from your paycheck?
If so, consider updating your W-4.
12. Do you expect your child to receive cash gifts?
If so, consider opening a custodial account (UGMA or UTMA) and possibly a 529 account.
13. Do you want to start saving for your child’s education?
If so, request a “What Issues Should I Consider Funding My Child’s College Education” checklist from me.
14. Do you need to review your beneficiary designations and estate plan?
If so, consider the following and follow up with your estate attorney:
a. Consider how the estate plan should be changed (such as needing a trust and trustee).
b. The child, or a trust for the benefit of the child, could be added as a contingent beneficiary to many accounts.
c. Appoint a guardian for the child if something were to happen to you and your partner.
15. Emergency fund, saving for retirement, and investing strategy
a. Unemployment is stressful and especially when your family is growing. It is important to have an emergency fund that will cover 6-12 months of living expenses in the event of a job loss. Calculate the fund need based on your new family budget.
b. It is a good time to review your investment strategy and savings plan both in the short and long term.
c. Be sure to take advantage of any employer-matching 401(k) contributions and give priority to your retirement savings over saving for college.
YOUR NEXT STEP
We make what can often be complicated, clear, and understandable for you and outline the pathways to achieve your financial goals. We start our relationship with clients by offering a free strategy session, where we listen and begin to understand your goals, needs, and concerns in the context of your overall financial picture. Then we will outline to you how we work with clients to achieve their financial goals.
It’s YOUR journey, YOUR destination and it’s our job to outline the pathways available to you so you can confidently overcome the challenges ahead and capture the opportunities along the way.