Starting a Family

Every stage of life has its own financial needs and concerns. The life events on this page can help you target the key financial strategies and issues that are likely to be most important to you in this stage of your life.

Preparing for Parenthood

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So you’re about to become a parent. Congratulations! Parenthood may be one of the most rewarding experiences you’ll ever have. As you prepare for life with your baby, here are a few things you should think about.

Reassess your budget

You’ll have to buy a lot of things before (or soon after) your baby arrives. Buying a new crib, stroller, car seat, and other items you’ll need could cost you well over $1,000. But if you do your homework, you can save money without sacrificing quality and safety. Discount stores or online retailers may offer some items at lower prices than you’ll find elsewhere. If you don’t mind used items, poke around for bargains at yard sales and flea markets. Finally, you’ll probably get hand-me-downs and shower gifts from family and friends, so some items will be free.

Buying all of the gear you need is pretty much a one-shot deal, but you’ll also have many ongoing expenses that will affect your monthly budget. These may include baby formula and food, diapers, clothing, child care (day care and/or baby-sitters), medical costs not covered by insurance (such as co-payments for doctor’s visits), and increased housing costs (if you move to accommodate your larger family, for example). Redo your budget to figure out how much your total monthly expenses will increase. If you’ve never created a budget before, now’s the time to start. If it looks like the added expenses will strain your budget, you’ll want to think about ways to cut back on your expenses.

Review your insurance needs

You may incur high medical expenses during the pregnancy and delivery, so check the maternity coverage that your health insurance offers. And, of course, you’ll have another person to insure after the birth. Good medical coverage for your baby is critical, because trips to the pediatrician, prescriptions, and other health-care costs can really add up over time. Fortunately, adding your baby to your employer-sponsored health plan or your own private plan is usually not a problem. Just ask your employer or insurer what you need to do (and when, usually within 30 days of birth or adoption) to make sure your baby will be covered from the moment of birth. An employer-sponsored plan (if available) is often the best way to insure your baby, because these plans typically provide good coverage at a lower cost. But expect additional premiums and out-of-pocket costs (such as co-payments) after adding your baby to any health plan.

It’s also time to think about life insurance. Though it’s unlikely that you’ll die prematurely, you should be prepared anyway. Life insurance can protect your family’s financial security if something unexpected happens to you. The death benefit can be used to pay off debts (e.g., a mortgage, car loan, credit cards), support your child, and meet other expenses. Some of the funds could also be set aside for your child’s future education. If you don’t have any life insurance, now may be a good time to get some. The cost of an individual policy typically depends on your age, your health, whether you smoke, and other factors. Even if you already have life insurance (through your employer, for example), you should consider buying more now that you have a baby to care for. An insurance agent or financial professional can help you figure out how much coverage you need.

Update your estate plan

With a new baby to think about, you should update your will (or prepare a will, if you haven’t already) with the help of an attorney. You’ll need to address what will happen if an unexpected tragedy strikes. Who would be the best person to raise your child if both parents die? If the person you choose accepts this responsibility, you’ll need to designate him or her in your will as your minor child’s legal guardian. You should also name a contingent guardian, in case the primary guardian dies. Guardianship typically involves managing money and other assets that you leave your minor child. You may also want to ask your attorney about setting up a trust for your child and naming trustees separate from the suggested guardians.

While working with your attorney, you should also consider completing advance medical directives. These documents allow you to designate someone to act on your behalf for medical and financial decisions if you should become incapacitated.

Start saving for your little one’s education

The price of a college education is high and keeps getting higher. By the time your baby is college-bound, the annual cost of a good private college could be almost triple what it is today, including tuition, room and board, books, and so on. How will you afford this? Your child may receive financial aid (e.g., grants, scholarships, and loans), but you need to plan in case aid is unavailable or insufficient. Set up a college fund to save for your child’s education. You can arrange for funds to be invested in the account(s) that you choose. You can also suggest that family members who want to give gifts could contribute directly to this account. Start as soon as possible (it’s never too early), and save as much as your budget permits. Many different savings vehicles are available for this purpose, some of which have tax advantages. Talk to a financial professional about which ones are best for you.

Don’t forget about your taxes

There’s no way around it: Having children costs money. However, you may be entitled to some tax breaks that can help defray the cost of raising your child. You may qualify for one or more child-related tax credits: the child tax credit, the child and dependent care credit (if you have qualifying child-care expenses), and the earned income credit (if your annual income is below a certain level). For more information about tax issues, talk to a tax professional.

Life Insurance at Various Life Stages


Your need for life insurance changes as your life changes. When you’re young, you typically have less need for life insurance, but that changes as you take on more responsibility and your family grows. Then, as your responsibilities once again begin to diminish, your need for life insurance may decrease. Let’s look at how your life insurance needs change throughout your lifetime.

Footloose and fancy-freeAs a young adult, you become more independent and self-sufficient. You no longer depend on others for your financial well-being. But in most cases, your death would still not create a financial hardship for others. For most young singles, life insurance is not a priority.

Some would argue that you should buy life insurance now, while you’re healthy and the rates are low. This may be a valid argument if you are at a high risk for developing a medical condition (such as diabetes) later in life. But you should also consider the earnings you could realize by investing the money now instead of spending it on insurance premiums.

If you have a mortgage or other loans that are jointly held with a cosigner, your death would leave the cosigner responsible for the entire debt. You might consider purchasing enough life insurance to cover these debts in the event of your death. Funeral expenses are also a concern for young singles, but it is typically not advisable to purchase a life insurance policy just for this purpose, unless paying for your funeral would burden your parents or whomever would be responsible for funeral expenses. Instead, consider investing the money you would have spent on life insurance premiums.

Your life insurance needs increase significantly if you are supporting a parent or grandparent, or if you have a child before marriage. In these situations, life insurance could provide continued support for your dependent(s) if you were to die.

Going to the chapelMarried couples without children typically still have little need for life insurance. If both spouses contribute equally to household finances and do not yet own a home, the death of one spouse will usually not be financially catastrophic for the other.

Once you buy a house, the situation begins to change. Even if both spouses have well-paying jobs, the burden of a mortgage may be more than the surviving spouse can afford on a single income. Credit card debt and other debts can contribute to the financial strain.

To make sure either spouse could carry on financially after the death of the other, both of you should probably purchase a modest amount of life insurance. At a minimum, it will provide peace of mind knowing that both you and your spouse are protected.

Again, your life insurance needs increase significantly if you are caring for an aging parent, or if you have children before marriage. Life insurance becomes extremely important in these situations, because these dependents must be provided for in the event of your death.

Your growing familyWhen you have young children, your life insurance needs reach a climax. In most situations, life insurance for both parents is appropriate.

Single-income families are completely dependent on the income of the breadwinner. If he or she dies without life insurance, the consequences could be disastrous. The death of the stay-at-home spouse would necessitate costly day-care and housekeeping expenses. Both spouses should carry enough life insurance to cover the lost income or the economic value of lost services that would result from their deaths.

Dual-income families need life insurance, too. If one spouse dies, it is unlikely that the surviving spouse will be able to keep up with the household expenses and pay for child care with the remaining income.

Moving up the ladderFor many people, career advancement means starting a new job with a new company. At some point, you might even decide to be your own boss and start your own business. It’s important to review your life insurance coverage any time you leave an employer.

Keep in mind that when you leave your job, your employer-sponsored group life insurance coverage will usually end, so find out if you will be eligible for group coverage through your new employer, or look into purchasing life insurance coverage on your own. You may also have the option of converting your group coverage to an individual policy. This may cost significantly more, but may be wise if you have a pre-existing medical condition that may prevent you from buying life insurance coverage elsewhere.

Make sure that the amount of your coverage is up-to-date, as well. The policy you purchased right after you got married might not be adequate anymore, especially if you have kids, a mortgage, and college expenses to consider. Business owners may also have business debt to consider. If your business is not incorporated, your family could be responsible for those bills if you die.

Single againIf you and your spouse divorce, you’ll have to decide what to do about your life insurance. Divorce raises both beneficiary issues and coverage issues. And if you have children, these issues become even more complex.

If you and your spouse have no children, it may be as simple as changing the beneficiary on your policy and adjusting your coverage to reflect your newly single status. However, if you have kids, you’ll want to make sure that they, and not your former spouse, are provided for in the event of your death. This may involve purchasing a new policy if your spouse owns the existing policy, or simply changing the beneficiary from your spouse to your children. The custodial and noncustodial parent will need to work out the details of this complicated situation. If you can’t come to terms, the court will make the decisions for you.

Your retirement yearsOnce you retire, and your priorities shift, your life insurance needs may change. If fewer people are depending on you financially, your mortgage and other debts have been repaid, and you have substantial financial assets, you may need less life insurance protection than before. But it’s also possible that your need for life insurance will remain strong even after you retire. For example, the proceeds of a life insurance policy can be used to pay your final expenses or to replace any income lost to your spouse as a result of your death (e.g., from a pension or Social Security). Life insurance can be used to pay estate taxes or leave money to charity.

Planning a Family? Get to Know Your Health Insurance Policy

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Congratulations! You’ve decided to start a family. Up until now, your health insurance has probably been adequate, paying for routine doctor visits and prescription drugs. But now that you’re facing a lifestyle change, you must make sure that your health insurance policy will keep up with those changing needs.

Check your coverageSome policies insure only spouses and dependent children. So, if you and your partner aren’t married, you’ll want to check your policy carefully. If coverage is an issue, and you don’t plan on getting married, consider whether purchasing an individual health insurance policy is an option.

Don’t wait until you become pregnant to look for that policy, though. The insurance company will know that you have a condition that’s going to require treatment and care. In a worst-case scenario, something happens (e.g., a difficult birth, or a premature baby), and the baby ends up in the neonatal unit. So, whenever you try to buy insurance for a condition that already exists, expect the cost to be high.

When will the baby’s coverage start?Usually, your baby will be covered from the time of birth. Even if you and your partner are not married, either one of you should be able to add the baby to an existing plan.

Find out what you have to do to add your baby to your health insurance policy. Some plans require you to add your baby within the first 30 days following birth. Other plans will waive the additional premium for the first 31 days if you enroll within 31 days following birth.

If you’re adopting an infant, and the birth mother has no insurance, you may have to pay for prenatal care and the costs of childbirth. If you’re adopting an older child, make sure that you know when your insurance policy will begin coverage.

What is covered before your baby is born?Will the plan pay for the first prenatal visit during the first trimester of pregnancy? Does the plan offer a prenatal program to assist you in having a full-term baby and avoiding a problem pregnancy? Some plans provide prenatal education, health screening to determine risk, and case management services to encourage a healthy delivery. Are services for any medical condition that may complicate a pregnancy covered? If your physician leaves the insurance plan while you’re pregnant, does the plan’s continuity of care policies cover the remainder of the pregnancy with the noncontracted physician if you’re already in the second or third trimester?

What is covered during and immediately after birth?

  • Is precertification required prior to hospital admission? If so, make sure you take care of it, otherwise you might have a problem with claim payments.
  • What length of hospital stay is covered? Do vaginal and cesarean deliveries have different time limits?
  • Is the baby’s stay in the nursery covered?
  • Does the plan pay for administering anesthesia, obstetrical procedures, and any assisting required?
  • If it is necessary for your baby to be hospitalized past the normal time period, will a separate deductible and coinsurance apply?
  • Will the policy cover any complications from a premature birth?
  • What if there’s a difficult birth that lands your baby in an expensive neonatal unit?
  • Does your plan provide care before the baby leaves the hospital, including routine tests, nursery service, doctor exams, and circumcision?

After you bring your baby homeHow easy will it be to get emergency care under your plan’s rules? Babies are susceptible to illnesses and injuries. You don’t want to have to wait for prior approval or drive past two hospitals while rushing your sick newborn to an approved medical facility.

Will the plan pay for transportation costs to the nearest facility to treat any special conditions? If so, is there a maximum amount?

Does the policy have a maximum amount it will pay for well-child care? Well-child care usually includes physical examinations, laboratory tests, developmental assessment, immunizations, and guidance necessary to monitor the normal growth and development of your child. How many years will it pay?

What if your adopted baby is born with medical problems you didn’t expect? Will the policy cover pre-existing conditions if you’re adopting an older child? Does the plan offer home visits for new mothers?

Understand your out-of-pocket expensesMany policies have a family deductible, which is the maximum amount that the family as a group must pay before the coverage begins. Instead of multiplying the individual deductible by the number of family members, the family deductible is often two or three times the individual deductible, regardless of how many family members are covered. The same is true of your coinsurance cap.

Review your co-payments. With a new baby, you will be making more trips to the doctor and buying more prescription medicines. It might be worthwhile to lower your deductible and co-payment. Your insurance premiums will be higher, but your benefits will be greater. Do a comparison to see what will work best for you.

Maximum lifetime benefitsThe Affordable Care Act prohibits individual and group health plans from placing lifetime limits on the dollar value of coverage, rescinding coverage except in cases of fraud, and from denying coverage based on pre-existing medical conditions. Also, plans may not place annual limits on coverage, except in the case of grandfathered plans.

Read your policy carefully and make sure you have the coverage you need. If you have questions, meet with an insurance professional. Understand how your policy works–what’s covered and what isn’t.

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Investing for Major Financial Goals

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Go out into your yard and dig a big hole. Every month, throw $50 into it, but don’t take any money out until you’re ready to buy a house, send your child to college, or retire. It sounds a little crazy, doesn’t it? But that’s what investing without setting clear-cut goals is like. If you’re lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.

How do you set goals?The first step in investing is defining your dreams for the future. If you are married or in a long-term relationship, spend some time together discussing your joint and individual goals. It’s best to be as specific as possible. For instance, you may know you want to retire, but when? If you want to send your child to college, does that mean an Ivy League school or the community college down the street?

You’ll end up with a list of goals. Some of these goals will be long term (you have more than 15 years to plan), some will be short term (5 years or less to plan), and some will be intermediate (between 5 and 15 years to plan). You can then decide how much money you’ll need to accumulate and which investments can best help you meet your goals. Remember that there can be no guarantee that any investment strategy will be successful and that all investing involves risk, including the possible loss of principal.

Looking forward to retirementAfter a hard day at the office, do you ask, “Is it time to retire yet?” Retirement may seem a long way off, but it’s never too early to start planning — especially if you want your retirement to be a secure one. The sooner you start, the more ability you have to let time do some of the work of making your money grow.

Let’s say that your goal is to retire at age 65 with $500,000 in your retirement fund. At age 25 you decide to begin contributing $250 per month to your company’s 401(k) plan. If your investment earns 6 percent per year, compounded monthly, you would have more than $500,000 in your 401(k) account when you retire. (This is a hypothetical example, of course, and does not represent the results of any specific investment.)

But what would happen if you left things to chance instead? Let’s say you wait until you’re 35 to begin investing. Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with only about half the amount in the first example. Though it’s never too late to start working toward your goals, as you can see, early decisions can have enormous consequences later on.

Some other points to keep in mind as you’re planning your retirement saving and investing strategy:

  • Plan for a long life. Average life expectancies in this country have been increasing for years and many people live even longer than those averages.
  • Think about how much time you have until retirement, then invest accordingly. For instance, if retirement is a long way off and you can handle some risk, you might choose to put a larger percentage of your money in stock (equity) investments that, though more volatile, offer a higher potential for long-term return than do more conservative investments. Conversely, if you’re nearing retirement, a greater portion of your nest egg might be devoted to investments focused on income and preservation of your capital.
  • Consider how inflation will affect your retirement savings. When determining how much you’ll need to save for retirement, don’t forget that the higher the cost of living, the lower your real rate of return on your investment dollars.

Facing the truth about college savingsWhether you’re saving for a child’s education or planning to return to school yourself, paying tuition costs definitely requires forethought — and the sooner the better. With college costs typically rising faster than the rate of inflation, getting an early start and understanding how to use tax advantages and investment strategy to make the most of your savings can make an enormous difference in reducing or eliminating any post-graduation debt burden. The more time you have before you need the money, the more you’re able to take advantage of compounding to build a substantial college fund. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.

Consider these tips as well:

  • Estimate how much it will cost to send your child to college and plan accordingly. Estimates of the average future cost of tuition at two-year and four-year public and private colleges and universities are widely available.
  • Research financial aid packages that can help offset part of the cost of college. Although there’s no guarantee your child will receive financial aid, at least you’ll know what kind of help is available should you need it.
  • Look into state-sponsored tuition plans that put your money into investments tailored to your financial needs and time frame. For instance, most of your dollars may be allocated to growth investments initially; later, as your child approaches college, more conservative investments can help conserve principal.
  • Think about how you might resolve conflicts between goals. For instance, if you need to save for your child’s education and your own retirement at the same time, how will you do it?

Investing for something bigAt some point, you’ll probably want to buy a home, a car, maybe even that yacht that you’ve always wanted. Although they’re hardly impulse items, large purchases often have a shorter time frame than other financial goals; one to five years is common.

Because you don’t have much time to invest, you’ll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

Tax-Advantaged Ways to Save for College

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In the college savings game, all strategies aren’t created equal. The best savings vehicles offer special tax advantages if the funds are used to pay for college. Tax-advantaged strategies are important because over time, you can potentially accumulate more money with a tax-advantaged investment compared to a taxable investment. Ideally, though, you’ll want to choose a savings vehicle that offers you the best combination of tax advantages, financial aid benefits, and flexibility, while meeting your overall investment needs.

529 plansSince their creation in 1996, 529 plans have become to college savings what 401(k) plans are to retirement savings — an indispensable tool for saving money for a child’s or grandchild’s college education. That’s because 529 plans offer a unique combination of benefits.

There are two types of 529 plans — savings plans and prepaid tuition plans. Though each is governed under Section 529 of the Internal Revenue Code (hence the name “529” plans), savings plans and prepaid tuition plans are very different savings vehicles.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer’s official statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.

529 savings plansThe more popular type of 529 plan is the savings plan. A 529 savings plan is a tax-advantaged savings vehicle that lets you save money for college and K-12 tuition in an individual investment-type account, similar to a 401(k) plan. Some plans let you enroll directly, while others require you to go through a financial professional.

The details of 529 savings plans vary by state, but the basics are the same. You’ll need to fill out an application, name a beneficiary, and select one or more of the plan’s investment portfolios to which your contributions will be allocated. Also, you’ll typically be required to make an initial minimum contribution, which must be made in cash.

529 savings plans offer a unique combination of features that no other education savings vehicle can match:

Federal tax advantages: Contributions to a 529 account accumulate tax deferred and earnings are tax free if the money is used to pay the beneficiary’s qualified education expenses. (The earnings portion of any withdrawal not used for qualified education expenses is taxed at the recipient’s rate and subject to a 10% penalty.)

State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals. However, be aware that some states limit their tax deduction to contributions made to the in-state 529 plan only.

High contribution limits: Most plans have lifetime contribution limits of $350,000 and up (limits vary by state).

Unlimited participation: Anyone can open a 529 savings plan account, regardless of income level.

Wide use of funds: Money in a 529 savings plan can be used to pay the full cost (tuition, fees, room and board, books) at any college or graduate school in the United States or abroad that is accredited by the Department of Education, and for K-12 tuition expenses up to $10,000 per year.

Professional money management: 529 savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.

Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time as well as roll over (transfer) the money in your account to a different 529 plan once per calendar year without income tax or penalty implications.

Accelerated gifting: 529 savings plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education while paring down their own estate, or a way for parents to contribute a large lump sum. Under special rules unique to 529 plans, a lump-sum gift of up to five times the annual gift tax exclusion amount ($15,000 in 2018) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $75,000 and married couples can gift up to $150,000. No gift tax will be owed, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.

Transfer to ABLE account: 529 account owners can roll over (transfer) funds from a 529 account to an ABLE account without federal tax consequences. An ABLE account is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26.

Variety: Currently, there are over 50 different savings plans to choose from because many states offer more than one plan. You can join any state’s savings plan.

But 529 savings plans have a couple of drawbacks:

No guaranteed rate of return: Investment returns aren’t guaranteed. You roll the dice with the investment portfolios you’ve chosen, and your account may gain or lose value depending on how the underlying investments perform. There is no guarantee that your investments will perform well enough to cover college costs as anticipated.

Investment flexibility: 529 savings plans have limited investment flexibility. Not only are you limited to the investment portfolios offered by the particular 529 plan, but once you choose your investments, you can only change the investment options on your existing contributions twice per calendar year. (However, you can generally direct how your future contributions will be invested at any time.)

529 prepaid tuition plansPrepaid tuition plans are cousins to savings plans – their federal tax treatment is the same, but their operation is very different. A 529 prepaid tuition plan lets you prepay tuition at participating colleges, typically in-state public colleges, at today’s prices for use by the beneficiary in the future. Prepaid tuition plans are generally limited to state residents, whereas 529 savings plans are open to residents of any state. Prepaid tuition plans can be run either by states or colleges, though state-run plans are more common.

As with 529 savings plans, you’ll need to fill out an application and name a beneficiary. But instead of choosing an investment portfolio, you purchase an amount of tuition credits or units, subject to plan rules and limits. Typically, the tuition credits or units are guaranteed to be worth a certain amount of college tuition in the future, no matter how much college costs may increase between now and then.

However, if your child ends up attending a college that doesn’t participate in the plan, prepaid plans differ on how much money you’ll get back. Also, some prepaid plans have been forced to reduce benefits after enrollment due to investment returns that have not kept pace with the plan’s offered benefits.

Even with these limitations, some college investors appreciate not having to worry about college inflation each year and want to lock in college tuition prices today. The following table summarizes the main differences between 529 savings plans and 529 prepaid tuition plans:

529 savings plans 529 prepaid tuition plans
Offered by states Offered by states and private colleges
You can join any state’s plan (though some plans may require you to enroll with a financial professional) State-run plans require you to be a state resident
Contributions are invested in your individual account in the investment portfolios you have selected Contributions are pooled with the contributions of others and invested by the plan
Returns are not guaranteed; your account may gain or lose value depending on how the underlying investments perform. Generally a certain rate of return is guaranteed in the form of a percentage of tuition being covered in the future, no matter how much costs may increase by then
Funds can generally be used for the full cost of tuition, fees, room and board, equipment and books at any accredited college or graduate school in the U.S. or abroad, or K-12 tuition expenses up to $10,000 per year Funds can be used only for tuition at participating colleges (typically state colleges); room and board and graduate school generally are not eligible expenses

Coverdell education savings accountsA Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school (K-12) at public, private, or religious schools. Here’s how it works:

  • Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account. The beneficiary must be under age 18 when the account is established (unless he or she is a child with special needs).
  • Contribution rules: You (or someone else) make contributions to the account, subject to the maximum annual limit of $2,000. This means that the total amount contributed for a particular beneficiary in a given year can’t exceed $2,000, even if the money comes from different people. Contributions can be made up until April 15 of the year following the tax year for which the contribution is being made.
  • Investing contributions: You invest your contributions as you wish (e.g., stocks, bonds, mutual funds, certificates of deposit)–you have sole control over your investments.
  • Tax treatment: Contributions to your account grow tax deferred, which means you don’t pay income taxes on the account’s earnings (if any) each year. Money withdrawn to pay college or K-12 expenses (called a qualified withdrawal) is completely tax free at the federal level(and typically at the state level too). If the money isn’t used for college or K-12 expenses (called a nonqualified withdrawal), the earnings portion of the withdrawal will be taxed at the beneficiary’s tax rate and subject to a 10% federal penalty.
  • Rollovers and termination of account: Funds in a Coverdell ESA can be rolled over without penalty into another Coverdell ESA for a qualifying family member. Also, any funds remaining in a Coverdell ESA must be distributed to the beneficiary when he or she reaches age 30 (unless the beneficiary is a person with special needs).

Unfortunately, not everyone can open a Coverdell ESA–your ability to contribute depends on your income. To make a full contribution, single filers must have a modified adjusted gross income (MAGI) of less than $95,000, and joint filers must have a MAGI of less than $190,000. And with an annual maximum contribution limit of $2,000, a Coverdell ESA can’t go it alone in meeting today’s college costs.

Custodial accountsBefore 529 plans and Coverdell ESAs, there were custodial accounts. A custodial account allows your child to hold assets–under the watchful eye of a designated custodian–that he or she ordinarily wouldn’t be allowed to hold in his or her own name. The assets can then be used to pay for college or anything else that benefits your child (e.g., summer camp, braces, hockey lessons, a computer). Here’s how a custodial account works:

  • Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account.
  • Custodian: You also designate a custodian to manage and invest the account’s assets. The custodian can be you, a friend, a relative, or a financial institution. The assets in the account are controlled by the custodian.
  • Assets: You (or someone else) contribute assets to the account. The type of assets you can contribute depends on whether your state has enacted the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). Examples of assets typically contributed are stocks, bonds, mutual funds, and real property.
  • Tax treatment: Earnings, interest, and capital gains generated from assets in the account are taxed every year to the child under special “kiddie tax” rules that apply when a child has unearned income. The kiddie tax rules generally apply to children under age 18 and full-time college students under age 24 whose earned income doesn’t exceed one-half of their support. Under the kiddie tax rules, a child’s unearned income is taxed using the trust and estate tax rates.

A custodial account provides the opportunity for some tax savings, but the kiddie tax reduces the overall effectiveness of custodial accounts as a tax-advantaged college savings strategy. And there are other drawbacks. All gifts to a custodial account are irrevocable. Also, when your child reaches the age of majority (as defined by state law, typically 18 or 21), the account terminates and your child gains full control of all the assets in the account. Some children may not be able to handle this responsibility, or might decide not to spend the money for college.

U.S. savings bondsSeries EE and Series I bonds are types of savings bonds issued by the federal government that offer a special tax benefit for college savers. The bonds can be easily purchased from most neighborhood banks and savings institutions, or directly from the federal government. They are available in face values ranging from $50 to $10,000. You may purchase the bond in electronic form at face value or in paper form at half its face value.

If the bond is used to pay qualified education expenses and you meet income limits (as well as a few other minor requirements), the bond’s earnings are exempt from federal income tax. The bond’s earnings are always exempt from state and local tax.

In 2018, to be able to exclude all of the bond interest from federal income tax, married couples must have a modified adjusted gross income of $119,300 or less at the time the bonds are redeemed (cashed in), and individuals must have an income of $79,550 or less. A partial exemption of interest is allowed for people with incomes slightly above these levels.

The bonds are backed by the full faith and credit of the federal government, so they are a relatively safe investment. They offer a modest yield, and Series I bonds offer an added measure of protection against inflation by paying you both a fixed interest rate for the life of the bond (like a Series EE bond) and a variable interest rate that’s adjusted twice a year for inflation. However, there is a limit on the amount of bonds you can buy in one year, as well as a minimum waiting period before you can redeem the bonds, with a penalty for early redemption.

Roth IRAsThough technically not a college savings account, some parents use Roth IRAs to save and pay for college. In 2018, you can contribute up to $5,500 per year. Earnings in a Roth IRA accumulate tax deferred. Contributions to a Roth IRA can be withdrawn at any time and are always tax free. For parents age 59½ and older, a withdrawal of earnings is also tax free if the account has been open for at least five years. For parents younger than 59½, a withdrawal of earnings–typically subject to income tax and a 10% premature distribution penalty–is spared the 10% penalty if the withdrawal is used to pay for a child’s college expenses.

But not everyone is eligible to contribute to a Roth IRA–it depends on your income. In 2018, if your filing status is single or head of household, you can contribute the full $5,500 to a Roth IRA if your MAGI is $120,000 or less. And if you’re married and filing a joint return, you can contribute the full $5,500 if your MAGI is $189,000 or less.

Financial aid impactYour college saving decisions can impact the financial aid process. Come financial aid time, your family’s income and assets are run through a formula at both the federal level and the college (institutional) level to determine how much money your family should be expected to contribute to college costs before you receive any financial aid. This number is referred to as your expected family contribution, or EFC. Your income is by far the most important factor, but your assets count too.

In the federal calculation, your child’s assets are treated differently than your assets. Your child must contribute 20% of his or her assets each year, while you must contribute 5.6% of your assets. For example, $10,000 in your child’s bank account would equal an expected contribution of $2,000 from your child ($10,000 x 0.20), but the same $10,000 in your bank account would equal an expected $560 contribution from you ($10,000 x 0.056).

Under the federal rules, an UTMA/UGMA custodial account is classified as a student asset. By contrast, 529 plans and Coverdell ESAs are counted as parent assets if the parent is the account owner. In addition, student-owned or UTMA/UGMA-owned 529 accounts are also counted as parent assets. For 529 plans and Coverdell accounts that are counted as parent assets, distributions (withdrawals) from the account that are used to pay the beneficiary’s qualified education expenses are not counted as parent or student income on the federal government’s aid form, which means that the money is not counted again when it’s withdrawn.

However, the situation is different for grandparent-owned 529 plans and Coverdell accounts. If a 529 plan or Coverdell account is owned by a grandparent instead of a parent, the account isn’t counted as a parent asset–it doesn’t count as an asset at all. However, money withdrawn from a grandparent-owned account is counted as student income, and student income is assessed at 50% in the federal aid formula.

Other investments parents may own in their name, such as mutual funds, stocks, U.S. savings bonds, certificates of deposit, and real estate, are also classified as parent assets. However, the federal government doesn’t count retirement assets at all in its financial aid formula, so Roth IRAs aren’t factored in to aid eligibility.

Regarding institutional aid, colleges generally dig a bit deeper than the federal government in assessing a family’s assets and their ability to pay college costs. Most colleges use a standard financial aid application that considers assets the federal government might not, for example, home equity. Typically, though, colleges treat 529 plans, Coverdell accounts, UTMA/UGMA custodial accounts, U.S. savings bonds, and Roth IRAs the same as the federal government.

Saving for Retirement and a Child’s Education at the Same Time

Saving for Retirement and a Child's Education at the Same Time

You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child’s education at the same time can be a challenge. But take heart — you may be able to reach both goals if you make some smart choices now.

Know what your financial needs are

The first step is to determine your financial needs for each goal. Answering the following questions can help you get started:

For retirement:

  • How many years until you retire?
  • Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
  • How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration’s website, You can also sign up for a my Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor’s, and disability benefits.)
  • What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
  • Do you or your spouse expect to work part-time in retirement?

For college:

  • How many years until your child starts college?
  • Will your child attend a public or private college? What’s the expected cost?
  • Do you have more than one child whom you’ll be saving for?
  • Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
  • Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

Retirement takes priority

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan!

If possible, save for your retirement and your child’s college at the same time

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8% annually, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment. Investment returns will fluctuate and cannot be guaranteed.)

If you’re unsure about how to allocate your funds between retirement and college, a professional financial planner may be able to help. This person can also help you select appropriate investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be suitable. It may be appropriate totreat each goalindependently.

Help! I can’t meet both goals

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll probably have to make some sacrifices. Here are some suggestions:

  • Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
  • Work part-time during retirement.
  • Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
  • Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
  • Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.
  • Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
  • Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty — a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
  • Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

Can retirement accounts be used to save for college?

Yes. Should they be? That depends on your family’s circumstances. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10% penalty on any withdrawals made before you reach age 59½ (age 55 or 50 in some cases), even if the money is used for college expenses. You may also be subject to a six-month suspension from plan participationif you make a hardship withdrawal in 2017. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

Estate Planning: An Introduction

Estate Planning: An Introduction

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you’ll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you’ll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.

Over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

  • A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
  • An advance medical directive: The three main types of advance medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

Young and single

If you’re young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don’t, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

Unmarried couples

You’ve committed to a life partner but aren’t legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you may consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

Married couples

For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. For decedents dying in 2011 and later years, the executor of a deceased spouse’s estate can transfer any unused estate tax exclusion amount to the surviving spouse without such planning.

You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die’s estate tax exclusion, and a credit shelter trust created at the first spouse’s death may still be advantageous for several reasons:

  • Portability may be lost if the surviving spouse remarries and is later widowed again
  • The trust can protect any appreciation of assets from estate tax at the second spouse’s death
  • The trust can provide protection of assets from the reach of the surviving spouse’s creditors
  • Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouses

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $152,000 annual exclusion, for 2018, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

Married with children

If you’re married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.

You may also want to consult an attorney about establishing a trust to manage your children’s assets in the event that both you and your spouse die at the same time.

You may also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

Comfortable and looking forward to retirement

If you’re in your 30s, you may be feeling comfortable. You’ve accumulated some wealth and you’re thinking about retirement. Here’s where estate planning overlaps with retirement planning. It’s just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

Wealthy and worried

Depending on the size of your estate, you may need to be concerned about estate taxes.

For 2018, $11,180,000 is effectively excluded from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.

Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth made to grandchildren (and lower generations). For 2018, the GST tax exemption is also $11,180,000, and the top tax rate is 40 percent.

The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. After 2025, they are scheduled to revert to their pre-2018 levels and cut by about one-half.

Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.

Elderly or ill

If you’re elderly or ill, you’ll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.

Wills: The Cornerstone of Your Estate Plan

Wills: The Cornerstone of Your Estate Plan

If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you’re young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn’t have to be drafted by an attorney to be valid, seeking an attorney’s help can ensure that your will accomplishes what you intend.

Wills avoid intestacy

Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This “intestate’s will” distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state’s distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills distribute property according to your wishes

Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.

Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what’s left after your other gifts.

Wills allow you to nominate a guardian for your minor children

In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children’s assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Wills allow you to nominate an executor

A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Wills specify how to pay estate taxes and other expenses

The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

Wills can create a testamentary trust

You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

Wills can fund a living trust

A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will “pours over” your estate to your living trust.

Wills can help minimize taxes

Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Assets disposed of through a will are subject to probate

Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Will provisions can be challenged in court

Although it doesn’t happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include:

  • You lacked testamentary capacity when you signed the will
  • You were unduly influenced by another individual when you drew up the will
  • The will was forged or was otherwise improperly executed
  • The will was revoked

How can I save for my child’s college education?

This is a very broad question that’s difficult to answer without knowing your individual situation. The option(s) you choose will depend on a number of factors:

  • Your need for strategies with tax advantages (some investments and savings vehicles offer special tax advantages if the money is used to pay college expenses)
  • The number of years you have to invest
  • The amount of money you have available to invest
  • Your income (some savings vehicles exclude parents above certain income limits)
  • Your willingness to put funds in your child’s name
  • Your risk tolerance
  • Your expectation of qualifying for financial aid

It may be helpful to consult a professional financial planner or tax advisor to determine the best option for your particular situation.

Yet there is one universal truth: You should start saving for your child’s college education as early as possible, preferably with regular monthly contributions that increase over time.

But what if your child is only a couple of years away from college? Your emphasis then won’t be on a savings program so much as it will be on what assets, if any, you might use for college expenses. Do you have retirement accounts? A cash value life insurance policy? Home equity? These are all sources of potential funds.

Who should I name as guardian of my children in case my spouse and I should die at the same time?


This is an extremely important question. After all, what can be more important than choosing a surrogate parent for your minor children? This process takes careful consideration and may be emotionally difficult, so you’ll want to take your time. The best guardian may not be the obvious choice.

You generally name a guardian in your will. Of course, spouses typically name each other as guardian first and then name an alternate guardian or guardians in case the spouse cannot serve for any reason, including death. Some parents nominate one guardian or guardians to care for the children and a different guardian to care for the children’s assets and finances. All of this is perfectly permissible. The court will have final approval but generally gives your selection the highest regard.

Who is the right guardian for your children? It’s customary for people to name parents, siblings, or best friends. You should select a responsible person with good character who shares your values and has the time and willingness to take on the job. When choosing a guardian, some of the things you may want to consider are:

  • Who loves and cares about your children?
  • Who do your children love and respect?
  • Who do you trust?
  • Who is financially and emotionally able to take on the responsibility?
  • Who is willing to take on the responsibility?

Be sure to talk with any prospective guardian before you nominate that person. Impress upon him or her the gravity of your request. Discuss your wishes regarding how you want your children to be raised (e.g., you want them to have a religious upbringing, or you want them to go to college) and what financial resources will be available (e.g., you have life insurance). Give the potential guardian plenty of time to think over your request carefully.

Should I buy life insurance on my child?


Since the main purpose of life insurance is to protect against financial loss when someone dies, it’s often better to wait until your child reaches adulthood to purchase life insurance. Although your child’s death would be a tragedy, it would probably not affect your family much financially unless he or she was earning a substantial amount of income for the family.

However, there are a few reasons why you might purchase life insurance on your child. For instance, you might buy life insurance on your young child so you can take advantage of the rates, which are lower for healthy children than for adults. Your employer may even offer inexpensive term coverage for dependents. Purchasing a policy while your child is healthy can also guarantee that your child will be protected throughout adulthood, even if he or she becomes ill, works in a hazardous occupation, engages in dangerous activities, or becomes uninsurable for other reasons.

Some parents also buy term insurance policies on their children to cover the time period when they are paying for their children to attend college or graduate school. If a child dies during this period, the death benefit can be used to help pay off college debt.

To find out if buying life insurance for your child makes sense in your situation, talk to a trusted insurance advisor.

How do I find quality child care?


Whether you’re looking for a nanny, a family day-care provider, or a child-care center, you’ll want to make sure that your child will be safe and happy in his or her day-care setting.

Start by asking your friends, family members, and neighbors for referrals to child-care providers that they’ve been happy with. You can also call Child Care Aware at (800) 424-2246 to find the Child Care Resource and Referral program nearest you. When you call your local program, you’ll be referred to child-care providers in your area and given information about selecting a child-care provider, including information about how your state regulates child care.

Once you’ve compiled a list of providers, visit each one that seems suitable. If possible, bring your child so that you can see how the provider interacts with your child. During the visit, look for signs that the home is clean and safe, and that the children who stay there seem happy.

Finally, ask the provider for references from other parents, and call them. It’s also essential to check state records to see if any complaints have been lodged against the provider.

Does it make sense financially for both me and my spouse to work after our child is born?


Following the birth of your child, you may feel that both you and your spouse need to work to meet household expenses and maintain your current lifestyle. However, you may discover that one of you can stay home without seriously affecting your net income. Though you would have to do without a second income, you need to factor in what you’d save:

  • Child-care costs: The cost per child for a day-care facility, nursery school, or nanny
  • Commuting costs: Gasoline, wear and tear on your car, tolls, and parking
  • Clothing: Work clothes and dry cleaning
  • Restaurant and take-out food: Prepared dinners you purchase because you have no time to cook
  • Lunches out: You have more time to prepare your own
  • House cleaning and gardening: Hired help to clean the house and mow the lawn
  • Taxes: With only one salary, you may move into a lower tax bracket

Now, consider the adverse effects of becoming a single-income household. The most obvious, of course, is a reduced family income. You should also consider what effect a leave of absence will have on the stay-at-home spouse’s career and your family’s retirement plans. You may both be at a point in your careers where you are earning high salaries. Leaving your job now may mean having to start over lower on the career ladder. And if one of you leaves work, you may miss the opportunity to fully fund your employer-sponsored retirement plan. Further, with only one income, you are more vulnerable in the event of an economic downturn. Finally, the stay-at-home spouse may lose the sense of accomplishment and community one gets from working outside the home.

You should balance all the issues, both pro and con. And remember, although it may make sense for both of you to continue working, some nonfinancial considerations, such as the opportunity to raise and supervise your child in your own home, may outweigh your financial concerns.

How do I pay for child care?


If you are like many working people with children, you commonly pay for your child-care costs out of current cash flow, including income from salaries, tips, investments, and other sources. Child care is part of your regular monthly expenses and generally cannot be avoided. However, some methods are available to you that may help save on taxes and reduce costs. For instance, your employer may include a designated flexible spending account (FSA) in its employee benefits package. You contribute pretax dollars, deducted from your paycheck, to a fund earmarked for dependent care expenses. You pay your day-care bills and are later reimbursed out of your tax-free FSA.

You and your spouse can more easily meet your child-care expenses by reducing costs. Some child-care providers allow parents to volunteer their services in exchange for a lower bill. Or, if possible, you and your spouse can work alternate work schedules so that at least one of you is home with your child for all or part of the day. This will allow you to pay for part-time day care or to fully avoid such costs. Other alternatives include job sharing, where you and another person fill one full-time job, allowing more free time to spend at home; telecommuting, where you work some days at home; or a compressed work week, where you work four 10-hour shifts during the week and spend the fifth day at home. You might also consider working part-time for a few years until your child is in school. If you work part-time, you could try to create a child-care swap with other neighbors who work part-time. In addition, some companies provide up to three months of paid parental leave time, so take full advantage if this is available to you.

When do I have to apply for a Social Security number for my newborn?


There’s no time limit on applying for a Social Security number for your newborn. However, you may want to do it right away, because you’re required to include a child’s Social Security number on your tax return to claim that child as a dependent.

There are two ways to apply for a Social Security number for your newborn. The first is to apply at the hospital when the baby is born. A doctor or hospital representative will ask for information to complete your baby’s birth certificate. Ask him or her to have your state’s vital statistics office share this information with the Social Security Administration. You’ll need to provide the Social Security number for each parent, although the application can proceed even if one parent’s number is unknown or not available. Your baby’s card will be mailed to you within a few weeks.

If you do not apply for the Social Security card at the hospital, you can apply for the baby’s number at a Social Security Administration office. You’ll need to fill out an application (Form SS-5). Generally, you’ll need to do the following:

  • Provide both parents’ Social Security numbers
  • Show evidence of your child’s age (the birth certificate), identity (a hospital record other than the birth certificate), and citizenship (the birth certificate)
  • Show evidence of your identity (a driver’s license or passport)

To obtain a copy of Form SS-5, access the Social Security Administration website or call toll free at (800) 772-1213 to request one. Mail or hand deliver the completed application to your local Social Security Administration office.

What is the kiddie tax?

Special rules commonly referred to as the “kiddie tax” rules apply when a child has unearned income (for example, investment income). In 2018, children subject to the kiddie tax are generally taxed using trust and estate income tax brackets on any unearned income over a certain amount. Prior to 2018, children subject to the kiddie tax were generally taxed at their parents’ tax rate on any unearned income over a certain amount. For 2017 and 2018, this amount is $2,100 (the first $1,050 is tax free and the next $1,050 is taxed at the child’s rate). The kiddie tax rules apply to (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.

In some cases, a parent had the option of reporting the child’s unearned income on his or her tax return in 2017. In other cases, the child had to file his or her own return. Each method of filing had several advantages and disadvantages.

Note that the kiddie tax rules apply regardless of whether the child is your dependent. Further, the definition of a child includes your legally adopted child and your stepchild.

You should note that a child who has significant tax exempt interest, or tax preferences or adjustments, may be subject to the alternative minimum tax.

What is the earned income credit and who qualifies for it?

The earned income credit (EIC) is a refundable tax credit available to certain low-income individuals who have earned income, meet adjusted gross income thresholds, and do not have more than a specified amount of disqualified income (excess investment income). If you file a federal tax return and meet all applicable requirements, your income tax (if any) will be reduced and you might receive a refund.

To qualify for the EIC, you must meet all of the following requirements:

  • Must have earned income
  • Tax return must cover a full 12 months (unless a short period is filed due to taxpayer’s death)
  • Filing status cannot be married filing separately
  • Cannot be a qualifying child of another taxpayer
  • Must not have filed forms related to foreign earned income
  • Must have no more than $3,500 of disqualified income (2018)

In addition, special rules will apply to taxpayers who have qualifying children and to taxpayers who do not have qualifying children.

For more information, consult a tax professional.

Can I take the tax credit for child care?


The child and dependent care credit is a tax credit for up to 35 percent of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work. To be eligible for the credit, you must care for a qualifying person, incur work-related expenses, and have earned income.

A qualifying person is:

  • Your dependent who was under the age of 13 when the care was provided and for whom you can claim an exemption, or
  • Your dependent who was physically or mentally unable to care for himself or herself and for whom you can claim an exemption (or for whom you could have claimed an exemption but for the income test), or
  • Your spouse who is physically or mentally unable to care for himself or herself, or
  • In certain cases, a dependent claimed by a divorced spouse

Child and dependent care expenses must be work related to qualify for the credit. That is, the expenses must allow you to work or look for work. If you are married, you must file a joint tax return and both you and your spouse must generally work or look for work. (Your spouse is treated as working during any month he or she is employed, or is a full-time student, or is physically or mentally unable to care for himself or herself.)

Your child and dependent care credit is a percentage of a portion of your work-related expenses. The qualifying expenses on which the tax credit is based are limited to $3,000 for one qualifying dependent, and $6,000 for more than one qualifying individual. The percentage used in calculating the credit is gradually reduced as adjusted gross income (AGI) exceeds $15,000. If your AGI exceeds $43,000, your credit is limited to the minimum allowed by this law–20 percent of qualifying work-related expenses.

For additional details, consult a tax professional.

What is the child tax credit?

The child tax credit is a per-child tax credit against your personal income tax liability. The child tax credit is $2,000 per child.

If you have a qualifying child under the age of 17, you may be entitled to claim this credit. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.

A nonrefundable credit of $500 is also available for qualifying dependents other than qualifying children.

The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level ($400,000 for married persons filing jointly, $200,000 for all others). The credit is reduced by $50 for each $1,000 that your MAGI exceeds the above amounts. To claim the child tax credit, you must file either federal Form 1040 or 1040A.

The credit is refundable, so you may be able to obtain a refund even if the credit exceeds your regular or alternative minimum tax (AMT) liability. Currently, the credit is refundable to the extent of 15 percent of your earned income in excess of $2,500, up to $1,400 per-child. Special rules may apply if you have three or more qualifying children and are eligible for the earned income credit (EIC).

After my child is born, doesn’t the law say I’m entitled to three months of leave?


The law you’re referring to is known as the Family and Medical Leave Act (FMLA). It entitles you to take up to 12 weeks of unpaid leave to care for your new child, but only if you work for a covered employer and meet certain eligibility criteria. Under this law, while you’re on leave, your employer-sponsored health insurance benefits are protected, and your employer must return you to the same job or a similar job when you come back to work.

You may be covered under the FMLA if:

  • You work for a private company that has 50 or more employees, or you work for a public school or agency that has less than 50 employees, and
  • You have worked at least 12 months (not necessarily consecutively) for that employer, and you have worked at least 1,250 hours during the 12 months immediately preceding your FMLA leave start date

Even if you are covered by the FMLA, your employer can require you to use any vacation days, sick days, or personal days you’ve accumulated in place of unpaid leave time. For instance, if you’ve accumulated two weeks of vacation time, your employer can ask you to use those weeks first, before giving you an additional 10 weeks of unpaid leave. You’re also required to give your employer at least 30 days’ notice of your need for leave, or as much notice as possible, depending on the circumstances.

You should also check the rules of your state, because some states have their own parental leave rules and may pay disability benefits to new mothers. However, if you’re not covered by any law, there’s not much you can do, unless you can negotiate more leave time with your employer.

What is the difference between the child tax credit and the child and dependent care tax credit?

These credits are quite different. First, the child tax credit. The purpose of this credit is simply to provide tax relief for parents, working or not, who have qualifying children under the age of 17. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.

If you’re eligible, you may be able to take a credit on your federal income tax return of up to $2,000 per child. The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level. A nonrefundable credit of $500 may also be available for qualifying dependents other than qualifying children.

The other credit — the child and dependent care tax credit — offers relief to working people who must pay someone to care for their children or other dependents. You may qualify for a tax credit equal to 20 to 35 percent of expenses incurred when someone cares for your dependent child (under age 13), your disabled spouse, or your disabled dependent so that you (and your spouse, if married) may work or look for work. The work-related expenses you can use when figuring the credit are limited to $3,000 for one qualifying individual, and $6,000 for more than one qualifying individual.

For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you’re a single parent or a divorced custodial parent.

For more information, consult a tax professional.