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By Sharon Overton, CPA
My husband and I are expecting our first child this month. With her arrival just around the corner, we have a lot on our minds, and coming up with a solid financial plan is at the top of our list. As my husband and I reviewed our financial situation and made adjustments to our budget, we learned about a couple of steps parents can take to save money that are worth sharing.
Set up a dependent care flexible spending account to pay for childcare expenses.
Childcare will soon be one of our largest household expenses. While for many, including us, there is simply no avoiding costly childcare, we have discovered a way to soften the blow to our wallets. If you and your spouse both work, consider asking your employer about setting up a dependent-care flexible spending account. A dependent-care account is tax-advantaged and can be set up through an employer's cafeteria plan. Dependent-care accounts are an important benefit for working parents because they allow employees to set aside a portion of their earnings on a pre-tax basis to pay for qualified dependent care expenses. As a general rule, married couples filing jointly may make pre-tax contributions of up to $5,000 annually to dependent care accounts.
A federal tax credit is also available for qualified dependentcare expenses; However, you cannot receive a credit for expenses reimbursed through a dependent-care account. As your household income increases, the federal tax credit decreases and the dependent care account becomes more valuable. You should consult your tax advisor to determine whether using a dependent-care account to pay for child care expenses or claiming the federal tax credit will result in greater tax savings for your family.
Open a 529 savings account to save for your child's future college expenses.
The cost of sending your child to college is increasingly expensive, but saving early and wisely will ease the financial burden when the time arrives. A 529 savings plan is a state sponsored education savings plan designed to help your family save for future college expenses with a designated beneficiary. 529 plans can provide substantial tax benefits to participants. Investments in 529 plans grow tax-deferred, and distributions from these plans for qualified education expenses are exempt from federal income tax. Such distributions can be used for tuition, fees, books and other education expenses. Although contributions to 529 plans are not deductible on your federal income tax return, many states allow state income tax deductions for contributions to the state's 529 plans. Another benefit of 529 plans is unused amounts can be transferred to other qualified members of the beneficiary's family with no tax penalty. Before opening a 529 savings account, you should consult with your financial/tax advisor.
When it comes to saving for future college expenses, it is important to balance your child's needs with your own long-term retirement goals. If, after assessing your financial situation, you are not able to make contributions to both retirement and college savings plans, continue making contributions to your retirement plan. Remember, affordable loans are available for college expenses, but you cannot take out loans to pay for your retirement.
Becoming a parent is undoubtedly the most exciting thing that will happen to either myself or my husband. Since we learned we are expecting, our priorities and financial plans have changed dramatically-so now we are using tools that will benefit our family, and hopefully yours as well.
Click here to read the complete article on Blush Magazine's website.
The contents and opinions contained in this article are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals.
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