Raising a child is one of the most amazing, joyful events life has to offer, but the financial challenge that accompanies this event is huge.  Following are some general guidelines for new parents to follow; however, they are not meant to substitute for a one-on-one meeting with a financial advisor.

Social Security

It is important to apply for a Social Security number for your child soon after his/her birth. The IRS now requires that you report the Social Security numbers of all children you claim as tax exemptions on your income tax. You will probably be able to apply for a Social Security number for your child through the hospital the same time you apply for a copy of the birth certificate. If not, contact your local Social Security office or call the Social Security Administration at 800-0772-1213 for more information.

Income Tax Considerations
At tax time, you’ll find out there are some financial benefits that help defray the cost of raising a child. You’ll suddenly be eligible for an extra exemption, and you may be eligible for one or more tax credits such as the child care tax credit, the child tax credit, and the earned income credit.

Saving for Emergencies
If you don’t have an emergency fund, now is the time to set one up. If your child gets sick, your car breaks down, you need to move unexpectedly, or you lose your job, you can dip into your emergency account. Experts recommend this account contain an amount equal to three to six months worth of living expenses.
 

Estate Planning Issues
It’s crucial to the welfare of your child that you leave behind instructions that clarify your wishes in the unlikely event that you die before your child grows up. If you don’t currently have a will, now is the time to draw one up. If you do have a will, you’ll need to review it. You’ll want to nominate a guardian for your child and decide how you want your assets distributed. You may also want to consider setting up a trust to protect your child’s interests after your death, and don’t forget to review your beneficiary designations.

Setting Up A Trust
Setting up a trust can be a good way of passing your assets along to your child. A trust document can describe how you want any money left to your child spent, and it can help to ensure that your child’s money is protected. A trust can help the guardian manage assets, minimize taxes, and make sure estate funds are used to benefit your child according to your wishes.

Life Insurance
Life insurance is another way of providing for your baby’s well-being or future education in the event of your premature death. As a new parent you should review any existing policies to see if they are adequate to provide for your child. If not, you may want to purchase more coverage. Consult your insurance agent or financial planner.
 

College Education
One of the major challenges you face as a parent is financing your child’s college education. Assuming tuition continues to rise at the current rates of 7% for state schools and 9% for private schools, by the time your child is ready for college the cost of a four-year education could average between $120,000 and $244,000. Given these figures, it is never too early to start saving for your child’s education, and by setting aside money now you can watch your investments grow.
 

There are many options available from conservative investments such as savings bonds, CDs, and money market deposit accounts (CDs and money market accounts are generally federally insured up to $100,000) to more risky yet potentially more rewarding ventures such as stocks, bonds, and mutual funds. The important thing to remember in planning to meet college costs is to save early and save regularly.

College Savings Plans
Certain states, such as Iowa, offer tax-deferred college savings plans known as “529 plans”. 529 plans are a good choice for investing monetary baby gifts because they are flexible and have no income guidelines. You may contribute anywhere from $25 to $10,000 annually with a one-time gift tax exclusion of up to $50,000. Withdrawals are now also tax free if the money is used for qualified education expenses. If your child does not go to college, the money can be used for another family member’s qualified education expenses.

Educational Savings Accounts
You are now able to set up IRAs for the purpose of paying college expenses. Contributions are allowed until your child reaches age 18. Contributions are made with after tax dollars so there is no tax deduction. This type of IRA allows you to make withdrawals to pay for elementary, secondary and college expenses. Neither ordinary income tax nor a penalty applies if distribution is used for tuition, fees, books or room and board.

Home Equity
If you own a home, you have another option available to you. You can take advantage of the equity you have in your home and use a home-equity line of credit for your child’s education. A benefit of doing so is your interest payments may be tax deductible.