I’m writing this as I await the arrival of another grandson, which made me ponder how money management will become an even more important part of his parents’ lives. Now with two college educations to save for, while also saving for the new home they are currently building, and their own future retirement, the ability to manage finances just became a little more complicated.

A huge amount of time is not necessarily required to get your finances moving in the right direction. It is often simply a matter of attending to the “basics.” The following steps may help you stay on track:

1. Pay Yourself First. It may seem like a long time until your retirement, but don’t wait to start saving for it. If your employer offers a match on your retirement savings, invest at least enough to receive the full match, otherwise you are leaving “free” money on the table. Many retirement savings plans let you select an automatic increase in savings each year, usually in 1% increments. This option eases you into saving more each year without drastically reducing your income.

2. Saving for Education Now. College tuition, at public and private institutions, continues to rise. So, relying on your children to receive scholarships or financial aid may not be the most practical strategy. Look into opening a 529 Plan account as soon as possible, even before they’re born. If you elect to open a 529 Plan account prior to the birth of the child, you can name a parent as the beneficiary, then switch the beneficiary to the child upon their birth. Even a small amount in the beginning helps, and the more time allowed for growth will maximize the savings. You can open a 529 Plan account for each child and set up an automatic investment from your bank account. Encourage grandparents and other family members to help fund the accounts when they want to give a gift to the children rather than toys or other items that will be quickly forgotten.

Another advantage in funding 529 Plans for your children came with the Tax Cuts and Jobs Act of 2017 (TCJA) passed in December. You may now distribute up to $10,000 per year from a 529 Plan for qualified education expenses for elementary or secondary school tuition incurred after December 31, 2017. Any elementary or secondary school for grades K through 12 is an eligible school if they require tuition. As of this writing, tuition is the only qualified education expense for 529 Plan distributions to elementary or secondary schools, unlike post-secondary education expenses which allows distributions for other qualified expenses. Please consult your CFP® or CPA® for clarification on the 529 Plan distributions allowed in your particular situation.

If it is important that you send your children to private school during their elementary or high school years, another option that you may consider is a Coverdell Education Savings Account (ESA). The Coverdell ESA is a custodial account created exclusively for the purpose of paying for the qualified education expenses of the designated beneficiary, which includes other expenses in addition to tuition where the 529 Plan can only be used to pay for tuition. Contributions to a Coverdell Education Savings Account are limited to $2,000 per year per beneficiary up to their age 18 in tax years 2017 and 2018. To qualify to make contributions, your Modified Adjusted Gross Income must be below $110,000 for single filers or $220,000 for joint filers. There is no deduction for making contributions, however, the account grows tax-free and distributed tax-free as long as the funds are used for qualified education expenses, such as tuition, fees, required books, supplies, equipment and qualified expenses for room and board at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Even though contributions are not allowed after the beneficiary reaches age 18, distributions may continue up to age 30 to post-secondary schools, as well. The Coverdell provides the flexibility of paying for your child’s education from Kindergarten through college. However, with the low contribution limit of only $2,000 per year, it may be difficult to save enough to cover the full expense.

3. Diversify Your Savings. Don’t forget to fund your emergency savings! Kids don’t always get sick or need orthodontic appliances when it’s convenient for your budget. Develop a plan to save for other large expenses that come with being parents. Transfer a set amount from your earnings to the savings account at your bank or brokerage firm each pay period to cover expenses that you may not have even thought about yet. Consider your liquidity needs, risk tolerance, and time horizon for possible expenses to determine how much to set aside and how it should be invested. Be sure to consult your CFP® Professional to determine an appropriate strategy for your financial future.

4. Roth IRA. If your finances are tighter than you’d like them to be, saving to your Roth IRA may be a way to streamline your savings. As the tax laws stand right now, you are allowed to withdraw the contributions you have made to your Roth IRA at any time. The caveat is that you MUST leave the earnings in until you reach age 59 ½. For example, if you contributed $10,000 and the investment in your Roth IRA gained $1,000, the most that you can withdraw is $10,000. The $1,000 of growth must stay in the Roth IRA until you reach age 59 ½ or later. You could fund your Roth IRA with the plan to take out your contributions in order to pay for education or other major expenses as they occur. With the current contribution limits of $5,500 per year up to age 50, you can realize some significant growth from the time your child is born to when she goes to college. If for some reason your children don’t need the funds for college, the Roth IRA is there to provide additional retirement income, as it’s intended, with the benefit of tax-free withdrawals.

5. Take Advantage of Tax Benefits. Each extra mouth to feed in your household may provide additional tax benefits. Limits to Adjusted Gross Income apply to all, so you should consult with your CFP® Professional or tax preparer to ensure you qualify before claiming these deductions.

Each qualifying dependent in your household may provide an additional Personal Exemption of $4,050 in tax year 2017, if you are under the adjusted gross income cap of $155,650. You’ve heard the phrase “Daddy’s little tax deduction”? Well, there it is! As of tax year 2018, the Personal Exemption disappears… until the TCJA sunsets in 2025.

What may be more significant are the child-related income tax credits! The Child Tax Credit may save you up to $2,000 for each qualifying child starting in tax year 2018. That is in addition to the Child and Dependent Care Credit which is allowed for expenses paid for the care of an individual to allow the taxpayer to work or look for work. You can find an interactive worksheet in IRS Publication 972 to determine if you may be eligible for this tax credit. Once your child begins college, you may be eligible for the American Opportunity Tax Credit of up to $2,500 or the Lifetime Learning Credit of up to $2,000.

6. Update Your Estate Plan. As new parents, your own mortality becomes a bit more real. If you have not had your estate plan documents prepared, it’s time to meet with an attorney for this very important task. You will need the attorney to prepare legal documents, such as a durable power of attorney, living will, and health care proxy, in addition to a will or trust. Before meeting with the attorney, you and your parenting partner need to decide who to designate as the legal guardian of your children, if both of you met an early demise. Your CFP® Professional can help update the beneficiary designations on all of your accounts after your attorney completes your estate plan documents.

7. Review Your Insurance Needs. Your life, health, and disability income insurance needs will change with the new addition to your family. Before your bundle of joy arrives, advise your health insurance company that you will be adding a child to your policy. Verify the deductible, which pediatricians accept your plan, and the coverage details.

If you have not elected to take long term disability insurance, now may be the time to add this coverage. It is a higher probability that you will suffer a disabling injury than die prior to retirement, although industry professionals are unclear to the exact probability, as Ron Lieber wrote in 2010. Trying to calculate the exact probability is difficult since it depends upon your current age and occupation. Also, the numbers you find when searching the internet may be a bit skewed since most statistics on this subject are quoted by the very people who want to sell policies to you. In most cases, you will also want to ensure that you have enough life insurance to at least replace your income for a few years, in case of an early death. Your fee-only CFP® Professional can provide an unbiased opinion regarding the amount of life and disability coverage required for your situation.

8. Plan for Child Care. If both parents plan to work, or in the case of a single parent family, child care is necessary. The cost of child care can be just as expensive as college tuition and might put a cramp in your cash flow. To avoid any unpleasant surprises, start shopping for your child care provider as early in your pregnancy, or adoption process, as possible. The cost will vary between the many options from in-home nanny to licensed day care provider to commercial child care centers. Find the provider that you’re most comfortable with first, don’t let cost be the leading determining factor. Once you have determined who will provide the care, compare the amount of this new expense to the after-tax income of the parent who would be the one to stay home, if that were an option. The result may surprise you! You may be money ahead to forego your salary for the added benefit of quality time with your child.

9. Maintain Good Credit. You can obtain one free annual credit report from each of the three major credit bureaus: TransUnion, Equifax, and Experian. Order one report from one of the credit bureaus every four months to monitor changes on a timely basis. Good credit is required for obtaining loans and maintaining low interest rates. Monitoring your credit can also help you guard against identity theft, as well as locking or freezing your credit, which you control.

Make a commitment now to start this planning process. Establish one-, three-, five- and ten-year goals. Working with a fee-only CFP® Professional who is focused on the financial needs of young families will keep you on track and help you to live your best life. Evaluate your progress yearly and make adjustments, as appropriate, to achieve long-term success. Attention to the “basics” may help you meet your financial goals and improve your financial well-being.

Melissa Ellis holds a M.S. in Personal Financial Planning from the University of Missouri – Columbia. She is a fee-only CERTFIED FINANCIAL PLANNER™ Professional, CERTIFIED DIVORCE FINANCIAL ANALYST™, and founder of Sapphire Wealth Planning LLC. Melissa is also a member of NAPFA and the XY Planning Network, professional organizations dedicated to supporting fee-only financial planners.

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