Author Topic: Financial Advice for Expectant Parents (529s, health spending, dependent care)  (Read 4311 times)

archiehr

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Hi all,

First time poster.  I started reading the forums a few months ago after I read the New Yorker article on Mr. Money Mustache.

My wife and I are expecting our first child in late September.  This board has been a wealth of advice and I figured that I would seek advice on my current situation.

What are some of the financial tips and actions I should take regarding the expansion in our family from two to three? 

I need to look into setting up a 529.  I use Vanguard for my savings, so I will look into 529 products offered by Vanguard.

On health care spending, my wife and I will max out our flexible spending account and health savings account.  We will use her flexible spending account for family medical expenses and my health savings account for carry over from year to year.  I know we can't carry over the flexible spending account (use it or lose it), but we can carry over my HSA b/c it is a high deductible plan.  My work does not offer low deductible plans anymore.

Lastly, we plan on sending the little one to daycare after my wife's maternity leave.  We both work.  I see that I can set aside up to $5,000 tax deductible for use towards daycare, which I intend to do.

Thanks for all your help and I suspect I have missed a few topics.  Cheers!

MDM

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What are some of the financial tips and actions I should take regarding the expansion in our family from two to three? 
I need to look into setting up a 529.

Congratulations on both the impending arrival and planning ahead! 

Do need a little more info to give specific advice.  See http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/.

In general, consider not worrying about the 529 or other college savings until your own retirement is well secured.


NoWorries

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I would definitely open a 529. It's a good idea to deposit any monetary gifts that you get for the child if you don't make contributions, and it's a good idea to make contributions if you are in a state that offers tax benefits that make it worthwhile.

My state offers: "State tax deduction or credit for contributions: A 20% tax credit on up to $5,000 per year in contributions to an Indiana 529 plan can be claimed against Indiana income tax (maximum yearly credit is $1,000)." So, an instant 20% return on contributions up to 5k. Pretty sweet!

But, I also agree with the above post. Focus on your own retirement and maxing out contributions, paying off debt, and getting yourself financially secure before contributing to a 529 (unless you have the tax benefit). I can tell you from experience that you would do more for your child(ren) by making sure that you are financially secure so that they don't worry about you in your older years. It's a helpless and horrible feeling to worry about aging parents with insecure finances.

Psychstache

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What if you live in a state with no income tax? My understanding is that 529 assets count heavily against EFC and without the state tax benefit, it's not really worth it.

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archiehr

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Thanks for the responses.  At the moment, my wife and I both work and in aggregate make above 100K.  We each max out our 401K and 403b respectively.  We have quite a bit of money saved for retirement and have paid off our mortgage.

At the present, I'm not too worried about my funds for retirement.  Just want to make sure that I make good financial moves while my child is young.

Any thoughts on the health care spending/dependent care?  Thanks for the responses already on the 529. 

seattlecyclone

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The dependent care flex spending account is great. The only reason you might not want to contribute to that is if you would be better off claiming the Child and Dependent Care Credit instead. At your income level, and with only one child, I would guess that the flex spending account will come out ahead.

Health care flex spending accounts are good if you're reasonably certain that you will actually use the money. Don't contribute more than you expect to spend in a best-case scenario.

The Vanguard 529 is good. The California one might have slightly lower fees, but it comes at the expense of dealing with yet another financial institution. Also look into whether you get state tax breaks for contributing to the one offered by your state instead. If so, that may be the better deal.

What if you live in a state with no income tax? My understanding is that 529 assets count heavily against EFC and without the state tax benefit, it's not really worth it.

A 529 counts the same as any other taxable asset on the FAFSA. Don't skip out on retirement contributions to contribute to a 529, but once you're maxing those out a 529 can be a fine choice. It's kind of like a Roth IRA for college in that you contribute post-tax assets and the growth is tax-free if used for college.

aceyou

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Thanks for the responses.  At the moment, my wife and I both work and in aggregate make above 100K.  We each max out our 401K and 403b respectively.  We have quite a bit of money saved for retirement and have paid off our mortgage.

At the present, I'm not too worried about my funds for retirement.  Just want to make sure that I make good financial moves while my child is young.

Any thoughts on the health care spending/dependent care?  Thanks for the responses already on the 529.

You guys are doing great, well done.

My wife and I are actually just putting a bunch into Roth IRA's, 403B's, and 457's, and plan to use the principal from the Roth.  Also, our oldest will go to college the year that our house is paid off, so we will divert that money towards education.  Between those two sources, we feel we'll have things covered to pay for at least half of our kids education without compromising our retirement at all.

I'm interested if someone could talk me into a 529 plan though.  Are their advantages that I'm not aware of? 

woopwoop

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I'm interested if someone could talk me into a 529 plan though.  Are their advantages that I'm not aware of?
Same... expecting a kid in September and am wondering if I should open a 529 plan given that I'm probably not going to have much income after my semi-retirement this year (dropping from $150k household AGI this year to probably $40k next year). Not to mention I'm in California and there's no state tax credit :( I'm leaning towards no but looking forward to what other people have to say.

AnEDO

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Our list of priorities are as follows:

First Level Priority
Maxed out 401ks
Maxed out family HSA
Fully fund the childcare FSA and wife's healthcare FSA

2nd tier priority
Max out ROTH IRAs

3rd tier priority
Invest in non-tax sheltered equities
Contribute to Vanguard 529

The 529 priority might change if we were in a state with income tax.  Reason for ROTH being higher priority is that you can use your original contributions to the ROTH to fund kids college if needed and as they are retirement assets, they don't count against you for financial aid purposes. 

Don't know if you know, but the 529 is treated as the parent's asset, not the child's which helps.  Also, you can change the beneficiary at any time to any eligible family member. 

sabertooth3

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If you already have a lot of money saved for retirement and a paid off mortgage, I'd lean toward contributing to the 529. Others have detailed the no state income tax issue already, but since it's likely that you do live in a state with an income tax it's probably worth it, particularly if they offer Vanguard funds.

My state offers $2k per year in income tax deductions, however the plans carry 0.75-1% fees. I don't have children yet, so I haven't had to make a decision yet, but would be interested in others' thoughts on the issue.

2buttons

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529 - I opened one the day we knew DW was pregnant. As other have said drop any cash gifts into that, don't buy ridiculous toys. Kids will likely have plenty.  I also drop a little cash in every month. 

other than that, I would up your term life insurance on both parents if necessary to cover kid needs etc. If you plan on sending to daycare, and have access to the Dependent care HSA max that thing out. 

Do a will.  Identify who will take your kids if both parents die.  Consider traveling separately on flights (although we have never done this), but some people do it to reduce risk of both parents gone.

Semi-Financial moves. 

1. Costco for diapers and wipes, and if you do formula, buy the costco brand formula.  Trust me. We wasted so much cash on the high end non-sense, before speaking with pediatrician.
2. Don't buy stupid kid things. For instance, we bought a wipe warmer.  Concept seemed to be sound until wipes started to slowly burn, and total waste of electricity and cash.
3. Spend money on time saving things. There is a new bottle out there that is dishwasher safe or easy to hand wash, and only has three pieces to it. God I wished we had those when ours were little.
4. If you cannot get around wife wanting some new things for kids, consider craigslist for everything else, but make sure its structurally sound and safe.
5. If kids get sick. Call your pediatrician before taking them in for an appointment. First time parents go into freak out mode over a hang nail and think the world is going to end, and usually the nurses will laugh at you and take your money.  Kids are actually pretty resilient.  Caveat to this - head bumps are worth a call every time.   

And remember people who are much less intelligent than you raise children and they thrive. 

Lastly, get a car seat that is not a pain in the butt, particularly ones where the straps don't tangle often.  Good luck.

woopwoop

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Others have detailed the no state income tax issue already, but since it's likely that you do live in a state with an income tax it's probably worth it, particularly if they offer Vanguard funds.
It's not just for states with no income tax. Many states just plain don't offer a tax credit, even if there is an income tax.

nickybecky1

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I'm not an accountant, but it was my understanding that a married couple can't have both an FSA and HSA, that they're mutually exclusive and that you can't have an HSA unless all family members are on high-deductible insurance that is HSA eligible. Have I been misunderstanding that all along?

slappy

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I'm not an accountant, but it was my understanding that a married couple can't have both an FSA and HSA, that they're mutually exclusive and that you can't have an HSA unless all family members are on high-deductible insurance that is HSA eligible. Have I been misunderstanding that all along?

We have an HSA and FSA, but the FSA is a limited FSA, which means that we can only use it for vision and dental.

seattlecyclone

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I'm not an accountant, but it was my understanding that a married couple can't have both an FSA and HSA, that they're mutually exclusive and that you can't have an HSA unless all family members are on high-deductible insurance that is HSA eligible. Have I been misunderstanding that all along?

We have an HSA and FSA, but the FSA is a limited FSA, which means that we can only use it for vision and dental.

Yes, if any family member has a regular FSA that can be used for all medical expenses, that can disqualify every family member from making HSA contributions for that year. However there are "limited purpose" FSAs designed to work with HSAs. These can cover any dental and vision expenses and/or post-deductible medical expenses.

cheapass

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Once your child is capable of chores, I would start keeping a log of their weekly duties and "paying" them into a Roth IRA. You'll have to file taxes each year, but the money grows and never gets taxed on gains or principal.

Proud Foot

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Lastly, we plan on sending the little one to daycare after my wife's maternity leave.  We both work.  I see that I can set aside up to $5,000 tax deductible for use towards daycare, which I intend to do.


Definitely do the Dependent Care FSA! Your numbers may vary due to state taxes but by maxing out my Dependent Care FSA I am saving around $1,500 on taxes as opposed to using the credit for child and dependent care expenses.  How the credit for child and dependent care expenses credit was set up for 2015 you will always come out ahead by using the Dependent Care FSA at your income level.
« Last Edit: July 19, 2016, 12:43:18 PM by Proud Foot »

archiehr

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I am confused on the FSA and HSA.  My wife has a different insurance plan than me.  She is on a low deductible plan and has an FSA.  I am on a high deductible plan (my company does not offer any low deductible plans) and I have a HSA.  Can I use her FSA for my health expenditures and just stash the money on my HSA for down the road when I am older and have more medical expenses?

Thanks for all the responses to my initial post.

MDM

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Can I use her FSA for my health expenditures and just stash the money on my HSA....
In short, no.

See https://www.irs.gov/publications/p969/ar02.html#en_US_2015_publink1000204025 for more details.  In particular, https://www.irs.gov/publications/p969/ar02.html#en_US_2015_publink1000204039:
Quote
Other health coverage.   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan.

   You can have additional insurance that provides benefits only for the following items.

    Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property.

    A specific disease or illness.

    A fixed amount per day (or other period) of hospitalization.

  You can also have coverage (whether provided through insurance or otherwise) for the following items.

    Accidents.

    Disability.

    Dental care.

    Vision care.

    Long-term care.

AnEDO

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In our situation, I have high deductible health insurance for myself as well as our oldest child.  We strategically put him on my plan so that we could put the full $6750 in my HSA.  My employer pays the premiums so it doesn't cost anything to have myself or my son on my plan.  I meet the IRS requirements for the family HSA contribution of $6750.  Once an HSA is funded, it can be used for immediate family members, including a spouse who has low deductible health insurance. 

My wife has better, low deductible medical insurance that we use for her and our other 2 kids.  We put $2500 in her healthcare FSA and make sure this is used first each year.  If I didn't have a high deductible plan available, we would all just be covered on her medical insurance.  We also take advantage of the $5000 childcare FSA each year.   

v8rx7guy

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When they try to convince you to do the fetal DNA testing, make absoluletly sure that your insurance covers it, or you could be in for a nasty $3000+ surprise.  We almost got stuck with the charges out of pocket