“The best inheritance a parent can give his children is a few minutes of his time each day.” — Orlando Aloysius Battista, Canadia-American chemist, and author
Most people want to give their children the world. But as wealth planners, we know that the best financial gift you can give your children is to ensure you are on financial footing. That may seem counterintuitive but think about it like this: Your kids can take out a loan for school or a house, but you cannot take out a loan for retirement. Instead, you would need to depend on them. So, as you contemplate starting a family, or if you are in the throes of raising one, consider these tips to ensure you provide for them and yourself throughout your entire life.
Starting your family
The first step when planning a family is gathering information, budgeting, and saving for increased expenses. Most people think about the higher costs for food, clothing, household items, and childcare, but the expenses start before then, during pregnancy. Because even if you have health insurance, you probably have copays, deductibles, or co-insurance that may hit your wallet during pregnancy and for the birth. These can be especially expensive if you go through fertility treatments or surrogacy.
Fertility treatments often are not covered by insurance. And they tend to be very expensive. Fifteen states require insurance to cover fertility treatments, and two others mandate optional coverage. In the rest of the country, getting good coverage for testing and multiple treatments may be challenging.1 Without insurance, a single cycle of in-vitro fertilization (IVF) treatments can cost over $15,000.2
Are you adopting instead of going through pregnancy? If so, there are both adoption tax credits and exclusions from income of employer-provided expenses. Tax credits cover all related costs, including adoption fees, attorney fees, and travel expenses. The maximum credit is $15,950 for 2023, but some rules affect taking these expenses.3 If your modified adjusted gross income is equal to or less than $239,230 you can receive the full amount of the credit; and if your modified adjusted gross income is more than $239,230 but less than $279,230, you will receive a reduced tax credit. Think of the tax credit as reimbursement for certain costs you incur as part of the adoption process.
One of the first things you need to do upon the birth or adoption of your child is to add your new family member to your healthcare plan. This must happen within a specified time, usually 30-60 days after birth or adoption. Even if you wait till the last minute, after-birth expenses should be covered retroactively. If you have a Health Savings Account (HSA) with a high deductible health plan, consider increasing the amount you put there, knowing you can roll what you don't spend into next year. You can put up to $7,750 pre-tax per year per family into it and use the money to pay medical expenses tax-free. If you have a Flexible Savings Account, consider increasing that, but remember you lose what you don't spend each year.4
While your overall costs will likely increase when you start a family, the government may give some of it back to you as a child tax credit when you file your taxes. Parents receive $2000 per child under 17 when they file a return for 2023 for those who qualify under the income limitation. In addition, 10 states also offer state-level tax credits: Vermont, California, Colorado, Idaho, New Mexico, New York, Maine, Maryland, Massachusetts, and Oklahoma. North Carolina, Michigan, and Connecticut have or are considering smaller deductions or one-time rebates.5
Raising your family
As your children grow, so do your expenses! Although costs vary by family, those with average incomes may spend at least $10-13k per year per child, increasing to $15k per year as they move through the teen years. Families with high incomes may spend twice that much. Where you live also affects this.6
Before they reach their teen years, childcare is one of the most significant expenses. See if your employer offers a Dependent Care Flexible Spending Account (DCFSA) to use tax-free money for childcare. For 2023, that amount is $5000 (for joint tax filers).
But just as you let that expense dwindle off your books, college costs loom. To handle this, start saving early. Consider opening and funding the 529 plan your state offers, so you get both the federal and state tax advantage. You contribute to these with after-tax money, but like a Roth IRA, all the investment's growth is tax-free—if spent on education. This can be substantial if you start when the baby is born, giving the investment 18 years to grow. For example, investing $10,000 at birth in a hypothetical diverse stock portfolio earning 7% a year, then adding $2,000 per year will yield $106,557 in 18 years, of which $60,557 is tax-free growth. This could save you over $14,000 in taxes at the 24% bracket.7 If the child does not attend college, you can switch the beneficiary's name to another child or yourself. You can also use $10k a year for K-12 costs or pay off student loans for the beneficiary.8
But here’s the sticky wicket about funding your child's education. We don't recommend you do it at the expense of your financial security. In other words, your child can take a college loan (usually one with generous payment terms), but you cannot secure a loan to fund your retirement. So don't forgo making your annual contributions to your 401(k) or IRA to fund a 529 or other college savings program.
Protecting your family
We look at financially protecting your family in three ways: Securing your financial future, providing support upon death, and having a sound estate plan.
Securing your financial future: As we previously mentioned, securing your future is the most important way to unburden your children. Suppose you have adequate assets to live a comfortable life without needing financial assistance from your children. In that case, you are freeing them to establish their financial security.
Providing support upon your death: Having life insurance is another financial gift you can bestow upon your family. We recommend that you get it immediately upon starting a family and not skimp. Insurance should cover living expenses and education for the family and help with retirement for your spouse. Remember, it is more expensive for a single parent to raise kids because they may need more childcare support.9 It’s good to review your life insurance coverage every five years or whenever you have a life change, such as having another child or other shifts to your expenses or lifestyle. And don’t forget to consider insurance for a non-working spouse.
Having a sound estate plan: Estate planning is another important way to protect your family. This is not just for wealthy people; it's for everyone with a family. Your plan should contain important documents, including your Last Will and Testament, Durable Power of Attorney to handle financial decisions if you can’t, and Healthcare Proxy to make medical decisions if you are incapacitated, among others. One of the easiest ways to start your estate plan is to designate beneficiaries for your assets. So if you find yourself postponing a formal estate plan (since you need a lawyer), at the very least, immediately name beneficiaries to your accounts.
The joys of parenthood
Being a parent is rewarding. But it’s also hard. So don't let a lack of financial plan make it more difficult! Fortunately, by designing a solid plan, you can help alleviate some of the financial stress of having a family. That way, you can spend your time and emotional bandwidth doing more important things, like going to little league games and dance recitals, relearning chemistry to teach it to your 15-year-old, or both enjoying and lamenting the quiet of the house as they spread their wings and fly.
What’s great about this financial journey is that you don’t have to take it alone. Instead, you can surround yourself with a team of helpers—from tax professionals to wealth advisors—who can help guide your decisions and set you on the best path. So, just like you guide your kids through life, let a team of professionals help you along the way.
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