Financial and Tax Planning: A 10-Point Checklist for New Parents and Families

Key takeaways Having children and growing a family can be expensive. Taking the time to create a financial plan, including creating a budget, obtaining insurance, understanding taxes, and managing investments, can guide you toward financial stability. New parents can benefit from being flexible. For example, making budget changes as needed and saving even small amounts each month for retirement. Financial planning can be complex. If you get stuck, research potential financial and tax advisors who have experience working with families.

Looking for a financial or tax advisor? Harness can connect you with experienced hand-picked tax, financial, and estate professionals from around the United States.

According to the Brookings Institution, the estimated annual cost, adjusted for inflation, of raising a child to the age of 18 is $310,605¹. That can seem overwhelming, but if you plan ahead, not only can it be manageable, but you can save enough money to potentially reach goals, from having a child to saving for college to retiring. 

To help you, we put together this guide with a 10-point checklist full of financial and tax planning areas to consider. Whether you are planning to have a child or already have two, this guide is here to help you navigate the complexities of financial life.

The 10-Point Checklist for New Parents and Families:

1. Plan for first-year baby expenses
2. Create or update your household budget
3. Build an emergency fund
4. Understand available tax benefits
5. Obtain proper levels of insurance
6. Start planning for college expenses
7. Prioritize your retirement savings
8. Consider estate planning
9. Consider setting up a custodial account
10. Work with expert advisors as needed

Tax and Financial Planning for New Parents and Families

Proper financial planning early on for new parents and families can reduce stress and support a more stable environment for a child’s growth. Raising children is expensive, from child care to college, but with the right planning, your family can balance short-term and long-term goals.

In this checklist, we’ll cover:

• Budgeting and Expense Planning: Establishing a detailed budget is vital for new parents, as it helps track and manage daily expenses while accounting for new costs such as childcare, healthcare, and education.
• Financial Planning: Comprehensive financial planning involves more than just managing immediate expenses. It includes setting up insurance coverage, saving for long-term goals, tax planning, and an investing plan. It also requires regular reviews and adjustments as the family grows and financial situations evolve.
• Working with Expert Advisors: Engaging with financial advisors, tax professionals, or estate planners may provide valuable guidance, ideally tailored to a family’s specific needs. These experienced professionals can help navigate complex financial landscapes, work to optimize your tax strategies, and assist in aligning all aspects of your family’s financial plan.

The 10-Point Tax and Financial Planning Checklist

From planning to cover expenses during your child’s first year to saving for education and retirement, follow this checklist to help you shape a healthy financial future.

1. Plan for first-year baby expenses

Planning ahead of time for first-year baby expenses is critical as it sets the tone for financial management as new parents. There can also be unexpected expenses, from smaller necessities to medical costs like prescriptions and doctor visits. Start by listing all anticipated expenses, such as nursery furniture, baby gear, daily supplies (diapers and formula), and medical expenses, including additional insurance. Research average costs in your area to set realistic expectations.

To help manage these costs effectively, consider:

• Have a shopping plan: Rather than simply buying things as needed where it is convenient, agree within your household on how you plan to shop. Look for sales, utilize second-hand stores, and accept hand-me-downs from family or friends to reduce expenses. For items like diapers and formula, price check items and find what works, then create a process to consistently buy what is affordable and functional for your family.
• Create a baby fund: According to a NerdWallet study, the potential cost of a baby’s first year of life can range from around $21,000 to nearly $52,000². Before the baby arrives, start setting aside money each month into a dedicated fund. Consider a high-yield savings account or another low-risk account that allows you to access your funds easily. Map out your estimated budget for the first year of being a parent and aim to save ahead of time an amount that will help you pay for expenses. This can help spread out the financial impact and reduce stress.
• Estimate healthcare costs: Map out estimated costs for both mom and baby, including prenatal care, postpartum care, and any appointments or medications you may need. If eligible, consider using a health savings account (HSA) or a flexible spending account (FSA) to cover qualified medical expenses. Individuals can contribute up to $4,150 to their HSA accounts in 2024, which allows two-parent households to contribute up to $8,300. Similar to HSAs, FSAs allow contributions up to $3,200 per year per employer, and if you’re married, your spouse can put up to $3,200 in an FSA with their employer too.
• Determine if you need child care: Childcare expenses creep up quickly. Decide ahead of time if you need care in the first year of your child’s life and beyond. Research child care centers or in-home programs and budget accordingly.
• Adoption expenses: If you are planning to adopt, research the cost far in advance. Adoption fees range widely and can reach as much as $60,000, according to the U.S. Department of Health and Human Services. Work with a tax advisor to see if you’re eligible for the IRS’s Adoption Tax Credit.

2. Create or update your household budget

With the addition of a new family member, your spending patterns will change. Create or update your household budget to reflect increased expenses such as childcare, healthcare, and baby essentials. 

Budgeting steps to take include:

• Track spending: Find what works for you. Consider a budgeting app or a simple spreadsheet to monitor your spending closely. If needed, you can work with a financial planner to help with budgeting along with other planning needs.
• Adjust spending categories: Increase budget categories for groceries, medical costs, and possibly utilities. Small increases across categories can add up at the end of each month, from using more water and electricity to getting takeout if you don’t have time to cook. Cut back where you can and be flexible as your situation changes each month.

3. Build an emergency fund

An emergency fund is more crucial than ever with the arrival of a child. Aim to have at least three to six months’ worth of living expenses saved. This fund can cover unexpected events such as medical emergencies or job loss. Consider your career and the amount of risk of losing a job. For example, a freelance consultant, a startup tech employee, and a public school teacher will likely all have different needs when building an emergency fund.

To build an emergency fund, consider:

• Using automatic savings: If you have consistent income, set up automatic transfers to a savings account dedicated to your emergency fund.
• Opening a high-interest savings account or CD: Your emergency fund is also an opportunity to earn interest to grow your savings. Shop around for high-yield accounts, and consider using multiple accounts, including a high-interest savings account, a money market account, or a certificate of deposit (CD). If you need help, a financial advisor can guide you through account types. 

4. Understand available tax benefits

Familiarize yourself with tax benefits for parents and families, such as the Child Tax Credit, Child and Dependent Care Credit, and Earned Income Tax Credit. Also, be sure that you are claiming all eligible state tax benefits when you file your tax return. The non-profit TCWF provides a map of resources to help you look up state tax benefits.

Consider working with a tax advisor to:

• File accurately: Be sure you are filing your taxes with the correct status and claims for dependents. An advisor can walk you through all tax credits and deductions to aim to minimize your tax liability.
• Adjust withholdings: Update your tax withholdings at work to reflect your new family situation. This can provide more monthly income rather than waiting for a large refund after filing.
• Consider tax-efficient accounts: You may be able to reduce your taxable income by leveraging certain types of retirement accounts or health savings plans. 

5. Obtain proper levels of insurance

Review and adjust your insurance coverage to meet your family’s needs. This includes health insurance, life insurance, and possibly disability insurance.

Review the following coverage:

• Health insurance: Make sure your health plan covers your baby’s needs and consider increasing your coverage. Compare plan types to understand premiums, deductibles, and any out-of-pocket expenses. If available, consider a plan that offers a pre-tax health savings account (HSA) or a flexible spending account (FSA) to cover qualified medical expenses while getting a tax benefit.
• Life insurance: You may want to obtain or increase life insurance to provide for your family in case of an untimely death. Even a small policy may help cover immediate expenses if something were to happen. 
• Disability insurance: Less common, but potentially valuable, is disability insurance. The purpose of disability insurance is to replace a portion of your income if you suffer an injury or illness that keeps you from working. If you have employer-provided disability insurance, make sure it is enough coverage for all household expenses for a certain period of time.

6. Start planning for college expenses

As of 2023, the average cost of college in the U.S.³ is $36,436 per student per year, according to the Education Data Initiative. The earlier you start saving for college, the better. Consider opening a 529 college savings plan, which offers tax advantages and can be used for tuition, books, and other educational expenses. 

To start saving for education, consider:

• Making regular contributions: Even small, regular contributions can grow over time due to compound interest. These funds can be used for traditional college, as well as vocational school, and in some states, private K-12 schools.
• Involve your family: Encourage family members to contribute to the fund during birthdays and holidays instead of traditional gifts. Some 529 plans have features that make is simple for family and friends to gift funds to your children.
• Updates to legislation: Recent legislation provided added benefits to parents saving for education. For example, the SECURE Act of 2019 expanded the definition of qualified expenses, allowing 529 plans to be used to repay the principal and interest on qualified education loans of the beneficiary or the beneficiary’s siblings. Parents can use a 529 plan to repay up to $10,000 in student loans per borrower. Additionally, the SECURE 2.0 Act, which passed Congress in 2022, provides parents who are saving for their children’s college funds the flexibility to, after 15 years, roll funds from the 529 plan into a Roth IRA account for the beneficiary. 

7. Prioritize your retirement savings

You’ll have to balance planning for retirement savings with other long-term savings needs, such as college tuition. As you think about this balance, consider that there are numerous ways to pay for college education, but you cannot turn back the clock to save for retirement. Either start or continue contributing to your 401(k), IRA, or self-employed retirement account, especially if there is an employer match which is essentially free money. 

Strategies to make saving easier include:

• Automatic payroll contributions: Increase your automatic contributions each year or whenever your salary increases.
• Diversify investments: Ensure your portfolio is diversified to help manage risk and target maximized returns over the long term. If you have complex or growing assets, such as employee stock equity or you own a business, a wealth manager can help build a diversified investment plan. 
• Retirement accounts for self-employed: If you work for yourself, consider saving for retirement with tax-advantaged accounts like a SEP IRA, solo 401(k), or a SIMPLE IRA.

8. Consider estate planning

Estate planning ensures that your assets are handled according to your wishes and provides for your children’s care. Without a proper estate plan, your assets may be distributed according to federal and state law, and further, inadequate planning can potentially subject your estate to unnecessary taxes and probate fees.

The general components of an estate plan potentially include:

• Will and trusts: A will is a legally binding document that outlines your wishes regarding the distribution of your assets after your passing. A trust, on the other hand, is a legal entity that can be used to manage and distribute assets to the beneficiaries of an estate.
• Power of attorney: Power of Attorney, or POA, is a legal document that grants a designated individual the authority to make decisions related to your property, finances, or medical care on your behalf, should you become incapacitated. 
• Healthcare directives: These are legal documents that allow you to specify your preferences regarding medical care in the event that you become unable to make decisions for yourself.

9. Consider setting up a custodial account

UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) accounts, also known as custodial accounts, can be a way to save for your child’s future needs. They can be used for education, a first car, a wedding, or other significant expenses. They are designed to hold and protect assets for minors until they reach the age of majority in their state, which is typically 18 or 21 years old, depending on the state’s laws. These accounts are commonly used by parents, grandparents, and others to gift assets to a minor without the need for a formal trust.

When setting this up:

• Flexible use: Unlike 529 plans, custodial accounts are not limited to educational expenses. Almost any type of asset can be placed in these accounts, including cash, stocks, bonds, mutual funds, and insurance policies. This makes them versatile tools for financial gifts.
• Tax implications: While the accounts do not provide the tax-deferred benefits of retirement accounts, they offer some tax relief. The main benefit is that parents may take advantage of the gift tax exclusion to fund the account while maintaining control over the assets while the child is a minor. Additionally, up to $1,250 in 2024 of any earnings from a custodial account may be exempt from federal income tax. After that, up to $1,250 in 2024 of any earnings in excess of the exempt amount may be taxed at the child’s tax rate, generally lower than the parent’s tax rate.

10. Work with experienced advisors as needed

Engaging with financial advisors, tax professionals, or estate planners can be helpful as you navigate having children or a growing family. Advisors aim to offer personalized advice tailored to your family’s needs and may help navigate complex financial decisions. 

To help select advisors, consider:

• Credentials: Look for a financial advisor with credentials including CFP, ChFC, and CFA designations. A tax advisor may hold a CPA or be an Enrolled Agent. Keep in mind that an advisor who holds a designation, license, or other credentials does not guarantee a certain outcome or success.
• Experience: Look for advisors who have experience in family financial planning and have access to tax and legal advisors that can also assist your planning needs.
• Fees: Understand the advisor’s fee structure ahead of time to avoid unexpected expenses. 

Financial and Tax Planning at Every Stage of Life

Whether you’re starting a family or starting a business, at Harness, we find hand-picked top tax, financial, and estate firms around the United States with the goal of helping you find the best advisor for you.

Once paired with an advisor, you’ll receive the guidance to create a comprehensive financial plan, balancing short-term and long-term needs. From financial to tax to legal planning, the Harness platform can connect you to the services you need at every stage of life. Explore Harness services today.

 

Tax related services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness”. Recommendations for registered investment advisers provided through Harness Wealth Advisers LLC, a paid promoter, internet registered investment adviser. This article should not be considered financial, tax or legal advice and is provided for informational purposes only. Please consult a financial, tax and/or legal professional for advice specific to your individual circumstances.

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Sources:

1. Welch, Morgan and Sawhill, Isabel. Brookings Institution, August 2022, estimated annual expenditures on a child born in 2015, adjusted for inflation using an average annual rate of  2.23% for years 2015 – 2020 and 4.0% after 2020, through the age of 17.
2. Renter, Elizabeth. Would-be Parents Unprepared for Cost of a Baby – NerdWallet, 2017, potential costs are based on theoretical households with income of $40,000 and $200,000, respectively. The methodology used for these calculations estimate the total cost of raising a baby in the first year of life by adding all annual totals in the following categories: housing; food; transportation; child care; out-of-pocket health care costs; health insurance; cost of starting a college savings account; life insurance; and toys, clothes and other miscellaneous costs. Additional assumptions included the lower income family wouldn’t qualify for substantial government assistance and the higher income family included costs of life insurance for both parents, in-home nanny car, and the recommended amount of college savings. For additional information on the studies used, methodology, and assumptions, visit www.nerdwallet.com/article/insurance/cost-of-raising-baby.
3. Hanson, Melanie. “Average Cost of College & Tuition” EducationData.org, May 28, 2024, https://educationdata.org/average-cost-of-college