Congratulations on your family’s new addition! The birth or adoption of a child is cause for celebration, but it also carries heavy responsibilities. In addition to protecting your child’s physical well-being, you need to ensure he or she will be financially secure.
Here’s what to do right now:
Make (or revise) your will. A will provides instructions on how your assets should be distributed and names a guardian for your child in the event that both you and your spouse die prematurely.
Buy life insurance. Even if your employer provides life insurance, it probably isn’t enough. According to many sources, raising a child born in 2015 to the age of 18 costs at least a quarter of a million dollars. Then there’s the cost of college, your house’s mortgage and your spouse’s living expenses. Remember that current stay-at-home parents may need life insurance to cover the possible cost of a full-time caregiver.
Update beneficiaries. The disposition of retirement plans upon death, such as 401(k) plans and IRAs, is guided by beneficiary designation forms rather than a will or trust agreement. Although you shouldn’t name your child as a beneficiary (minors can’t legally inherit assets), consider establishing a trust and naming a trustee to ensure your child’s financial needs will be met.
Apply for a Social Security number. You’ll need your child’s Social Security number to take advantage of tax benefits for parents with dependent children. Social Security numbers also are required to open a bank or investment account for your child.
Set up an education account. According to the College Board, a child born in 2015 can expect to spend as much as $324,000 just to attend a four-year college. As formidable as that might sound, 529 college savings plans can help parents and children reach their education goals.* Earnings on 529 plan contributions grow tax-deferred for federal income tax purposes and withdrawals used to pay for qualified higher education expenses (such as tuition and fees and, generally, room and board) avoid federal income tax, making the tax deferral permanent. Some states offer additional tax incentives.
Establish an emergency fund. If you don’t already have a “rainy day fund,” establish one. Aim to save at least three to six months’ worth of living expenses so that, if you lose your job or your child needs something you hadn’t anticipated, the money will be there.
* There is no guarantee that the plan will grow to cover college expenses. Depending on the laws of your home state or on your designated beneficiary, favorable state tax treatment or other benefits offered by your home state for investing in 529 college savings plans may be available only if you invest in the home state’s 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many factors considered in making an investment decision. Consult with your financial, tax or other advisor to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other state to learn about the features, benefits and limitations of that state’s 529 college savings plan.
Please consider the investment objectives, risks and charges and expenses associated with municipal fund securities, including 529 plans, before investing. This and more information is available in the issuer’s official statement. Please ask the issuer for an official statement and read it carefully prior to investing. You should consult with a tax advisor regarding the state tax consequences of any investment in a 529 plan.
If you’re a dentist, you’re an entrepreneur. You have a family to take care of in addition to your dental practice. At H+P Advisors, we are dental financial experts. We’re here to help! Call us today for a consultation.