There is no denying that having a baby is life-changing and expecting an infant is overwhelming and wonderful.
Learning that you are going to be a parent brings the future into sharper focus and you realize it’s time to start planning for the changes that are coming your way.
Financially, expectant parents face a range of expenses from medical care, to baby equipment, to estate planning. Navigating these pregnancy costs requires a bit of an investment and more than likely, professional assistance.
Here’s what to plan for financially and what to review before ‘Baby’ arrives.
According to Business Insider, the average medical cost of having a baby in the US is $10,808.
The cost varies, of course, and depends on many factors. Amongst these are where you live, your insurance coverage, how you deliver (vaginally or cesarean), and the prenatal treatments/tests you may need.
For example, a cesarean section costs can range from $5,000 to over $30,000! Of course, your insurance will be paying a part of this cost.
What is the best way to estimate your costs associated with pregnancy?
Call your insurance provider! This is the best method for discovering your costs.
It’s important to contact your health insurance provider to find out the details of your coverage and ask questions that will help you estimate the charges for:
- Prenatal care
- Out of pocket expenses
- Hospital stay
- Emergency costs
- Post-natal care
Determining these costs in advance allows you to get the most out of your insurance and extra savings from FSA/HSA accounts.
Your health insurance provider can also provide you with a list of in-network providers, required pre-registration and/or possible restrictions specific to your coverage.
When does your baby obtain medical insurance?
Now is also a good time to confirm when the baby will be covered under the policy and what steps you will need to take to have them added. Typically, there is a 30 day period for enrolling a newborn, if it’s missed you may have to wait until your company’s annual open enrollment period. Missing open enrollment could mean that you are exposed to larger out-of-pocket costs if your child needs any care.
There are 5 essential items new parents need to consider when Estate Planning, according to a recent article from Kiplinger financial planning:
- Health Care Proxy and Executing a Power of Attorney
– These are considered “Living Documents” and ensure that another adult has the power to make decisions for an adult who is incapacitated
- Naming a Guardian and a Custodial Trustee
– These two individuals will work as a team; one to care for the child and the other to care for your child’s finances
- Creating/Updating A Will and Possibly a Trust
– These documents outline your wishes after you pass. Keep in mind that if you don’t create a will or update it after you have a child, you’re leaving your most important assets, in the hands of the courts (a process called probate)
– Probate is extremely expensive and is a bureaucratic drag
- Evaluating Life Insurance Coverage
– Purchasing or possibly raising coverage on life insurance policies is critical for both parents. There is a dependent on the way who needs to be cared for and a spouse who needs the security of added coverage should the unthinkable happen.
- Updating Account Ownership and Beneficiary Designations
-Proper beneficiaries will ensure that assets are assigned according to the documents you have prepared.
The cost for preparation of these documents pales in comparison to the comfort of knowing that your loved ones are protected and well cared for. These safeguards are essential for the care of your new family.
Approximate costs of estate planning range from $1500 – over $4,000. However, the cost of probate court fees and attorneys easily surpass $20,000. It’s a no-brainer to plan ahead and properly plan your estate before the need ever arises.
Another important factor to consider is time off from work- maternity/paternity leave. The FMLA or Family and Medical Leave Act is a federal lw requiring employers to provide at least 12 weeks of unpaid leave for expecting mothers and fathers. This law guarantees you will have a job to return to but does not guarantee that you will have an income during your time off.
During your pregnancy, reach out to your Human Resources department for help in determining company policies regarding paid time off and FMLA leave. Some employers may not fall under the FMLA requirements yet others may even offer a form of short term disability or other forms of paid leave for expectant parents.
Like everything else, it pays to ask and perform due diligence in finding out exactly what benefits are going to be available to you.
Periods of lost or reduced income are costs that no family wishes to face unexpectedly.
So having this information early can help you prepare and start saving, if necessary.
As your family gets larger, it seems other things in your life need to grow as well. It’s not unreasonable to include the cost of larger living spaces or perhaps a bigger vehicle, in the cost of pregnancy.
A one-bedroom apartment or a two-seater sports car, just aren’t practical for family life. So
depending on your situation, it may be time to make some lifestyle changes before Baby arrives.
Believe it or not, that tiny little bundle needs space (a lot of space) for all of their stuff. However, don’t let the fact that you are going to have a baby destroy your financial planning. Before making larger purchases, consider how those purchases are going to affect your future finances and well-being of your family. Frequently splurging on expensive items and neglecting your financial plan (such as saving and investing) is not the best way to provide a great life for your family.
According to Baby Center.com and their baby-cost-calculator, it costs approximately $8000-$15,000+ for infant care in the first year.
This number is for a stay at home parent, with a breastfed baby, who is purchasing disposable diapers. This number also includes a pretty comprehensive list of the one-time costs of infant items such as cribs, clothing, and strollers.
The handy calculator https://www.babycenter.com/baby-cost-calculator
allows you to calculate different variables such as daycare vs. nanny, and diaper service vs. disposables, which helps to personalize the cost and causes it to vary widely.
Technically, baby care is a cost that would be incurred in the infant’s first year. Since most of these decisions and purchases need to be in place before the baby arrives, they really should be considered a cost of pregnancy.
Recent studies demonstrate that over the course of 18 years, costs for raising one child are approximately $235,000.
We also have to consider mom’s needs and specifically, her wardrobe. Maternity clothes are a must for keeping mom feeling and looking her best. The cost will vary depending on mom’s career, needs, and preferences, but she’s probably going to need to spend a fair amount of money on clothes and shoes.
Pregnancy yoga, pregnancy massage, pregnancy chiropractors, doulas, etc. may also be essential costs for Mom’s well being. This is in addition to all of the necessary, and sometimes unplanned, prenatal and pregnancy costs.
These costs may be considered elective and not covered under health insurance but may qualify for FSA/HSA expenditures.
Increased Expenses means it’s time to examine your budget.
Aside from one time costs for Baby, and mom’s pregnancy essentials, your monthly expenses are also going to increase. During pregnancy, start to investigate these costs and develop a plan.
Some questions to ask:
- Has our rent/mortgage increased?
- What is the cost of Childcare?
- How much college savings should we be investing?
- How much do we expect our food budget to increase?
- Will our insurance premiums change?
- What items are considered “eligible expenses” for HSA and FSA accounts?
With some forethought, you and your partner can have a reasonable budget in place before Baby comes home from the hospital.
There are going to be many surprises in those first few months— finding out you have “more month than money” doesn’t need to be among them.
A note on eligible expenses for HSA/FSA accounts: the list is far too long to include here and there are probably expenses that you may find surprising. Ask your insurance company for a eligible cost lists or perform a simple internet search.
During pregnancy, It may be worth your while to schedule an appointment with your tax advisor to discuss the tax consequences of having a baby.
Here are some things to consider
- Updating your W-4 at work
- Adding a dependent to your deductions could result in increased take-home pay
- However, consider how your tax burden may change come April
- Obtaining a Social Security Number for your child
- In order to claim your child as a dependent on your taxes, you will need to register them for a SSN#. This can be done before you leave the hospital when you are filling out your child’s birth certificate
- Learn about tax credits and deductions
- For 2018 and 2019, the tax credit for a new baby is up to $2000 per qualifying child
- Up to $1,400 of the tax credit is refundable
- You may also be eligible for earned income credits, childcare credits, adoption credits, college savings benefits
- To be clear, a child entitles the parents to both tax deductions and tax credits. Both reduce your tax burden, but in different ways
- Do you have a nanny?
- You are the nanny’s employer and must report this on your tax documents
- Does your child have income from investments?
- You will have to report this on your tax forms
- Known as the “kiddie tax”
Qualifying for the Child Tax Credit
The child can be your child from birth, adoption, a foster child, or even a step-child.
Your income level is capped at $200,000 if single and $400,000 if married filing jointly.
The child must be under 16 years of age prior to December 31st of the year the credit is being solicited
The government may give you up to a 35% dollar-for-dollar credit, up to $3,000 for childcare costs. The credit is scaled according to the parent’s income.
Check with your financial planner and/or tax specialist to determine how much of credit you may be eligible for. In addition to the federal credit, some states also offer a childcare credit.
Adoption Tax Credit
Yes, there is a credit for that!
For 2019, the federal adoption tax credit is $14,080, which is scaled according to income.
If your modified adjusted gross income is:
- Less than $211,160, you are eligible for the full credit
- More than $211,160 but less than $251,160, you are eligible for a reduced credit
- More than $251,160, you are not eligible for the credit
Savings & Investments
Planning for a baby is planning for the future. As mentioned above, be careful to not completely disregard your saving and investing plans. One of the best ways to protect your family is to plan for their financial future.
Pregnancy is an ideal time to re-evaluate your portfolio. Are your investments too risky? Too conservative? Is it time to change contribution amounts?
You will certainly need to continue saving and investing for your retirement. But the future holds many things for your new family- college, braces, cars…
A financial advisor can help develop a plan that’s right for you. They will also be able to advise you on savings strategies and products for minors.
Here are some to Explore:
- Open a savings account
- Open a Roth IRA
- Look into 529 college plans
- Opt for a Coverdell education savings account
- Consider prepaid tuition plans
- Open a Uniform Gifts to Minors Act or UTMA account
- Set up a Trust for education
- Invest in treasury bonds
A quick overview of some of the lesser-known saving options
529 College Plan
This a a tax-advantaged savings arrangement that allows parents to save for future college costs. There are two types of 529 plans, according to the U.S. Securities and Exchange Commission:
- Pre-paid tuition plan
- Educations savings plan
The pre-paid plan allows you to purchase college credits at current prices for your child. Considering the alarming rate at which college tuition is increasing, this may be an attractive plan.
The education savings plan allows you to open an investment account focused on growth in the child’s early years and then shifts to a more conservative portfolio as the child nears college age.
A 529 plan can receive contributions and “gifts”
States set contribution limits. Washington state allows for contributions up to $500,000
This account type offers a way for minors to own securities and eliminates the need to hire an attorney for the preparation of trust documents.
The parents act as fiduciaries, and must follow fiduciary standards and the money in the account is part of the parents’ taxable estate. Any income that is generated from this account is subject to the “kiddie tax” and therefore must be reported on your tax documents.
This account type is an after-tax savings account, similar to a Roth. Withdrawals made on this account are tax-free.
The yearly contribution limit is currently $2,000
There are several nuances to all of these saving vehicles so reach out to your financial advisor to see what will be best for you and to establish a plan that allows you to maximize savings.
With careful planning, you can start your family off on the right financial path. Schedule appointments during your pregnancy with the tax, law and financial professionals on your Team.
Then when the baby comes you can focus on the truly important thing, your family.
After all, An addition to the family may come with added costs but also added joy and being a parent will make your life richer in ways you never thought possible.
As always, don’t try to navigate all of these difficult concepts on your own. Make an appointment with your financial advisor and tax specialist early on if you are trying to have kids or know that you are pregnant.