Planning for pregnancy

New Baby? Make a New Financial Strategy

(ARA) - When baby makes three, budgets sometimes fly out the door, lost in the rush of diaper changes and middle-of-the-night feedings. We all know babies are not cheap and thinking about college tuition sends that figure significantly higher. If you haven't adjusted your financial strategy to accommodate the needs of your future heirs, there are some key considerations to keep your long-term financial security intact.

Up the Ante on Life Insurance

Once you become a parent, it is crucial that you make adequate provisions for your child should one or both parents die. But how much insurance do you need? You'll need to consider things like your earnings and the total amount of your household debt. It's also a good idea to provide enough to cover the costs of college tuition for each child. If only one parent works outside the home, be sure to calculate the cost of hiring full-time childcare, should the stay-at-home parent die prematurely. Once you own a life insurance policy, be sure to update your beneficiary designations after the birth of each child.

The Price of Higher Education

One of the most common questions new parents ask their financial professionals is, "When should we start saving for college?" And the universally agreed upon answer is: "When the child is born." When it comes to the skyrocketing costs of higher education, time and compound interest can definitely work in your favor. And thanks to provisions in the tax law, there are a couple of attractive college savings options such as state-offered "Section 529 plans" and "Coverdell Education Savings Accounts" that can provide significant federal and state tax advantages.

Claim Those Deductions

Diapers. Pre-school programs. School supplies. Braces. Daycare. There's no question parents deserve a financial break. The good news is, the government offers several tax breaks for parents that are worth exploring. A common one that many people neglect to take advantage of is a Flexible Spending Account (FSA) offered by many medium- to large-size employers. These employer-sponsored plans typically allow you to sock away as much as $5,000 of pre-tax money for child-care expenses, reducing your taxable income. Some employers even offer a company funds match.

If you don't work for a company that offers an FSA, take heart. You may qualify for a child-care tax credit if both parents are working and your child is under age 13. The credit is a percentage (based on your adjusted gross income) of the amount of work-related child and dependent care expenses you paid to a care provider. The credit can range from 20 to 35 percent of your qualifying expenses. Keep in mind these tax breaks are either/or—you can't participate in an FSA and take the child care credit too (if you have two or more qualifying individuals and $5,000 in an FSA, you can take credit for up to $1,000 additional expenses not covered by the FSA).

Another big tax perk: The $1,000 annual child tax credit, which applies to children under age 17. Couples filing jointly who have one child and earn no more than $110,000 can claim the full credit—which may almost cover the costs of diapers that first year.

Put it in Writing: the Need for a Will

New parents may assume they don't need a will because they have minimal assets. But asset disbursement is not the sole reason for a will. This type of document is essential for you to designate a guardian for your child in the event you die before that child reaches adulthood. An attorney can draft a will for you in which you name an executor who would pay your debts and distribute your assets and name a guardian for your children. If you have special concerns, such as the support of a minor or disabled child, you may want to set up a more complex estate plan that includes a custodial account or a trust.

Your new bundle of joy came into the world with nothing but a birthday suit, but the next 18 years will prove to be anything but expense-free. Adequate planning now can keep that small addition from creating big financial headaches later. For more information, visit www.prudential.com.

Courtesy of ARA Content