Registered investment advisors likely have a fair amount of clients that are parents. As such, they’re likely engaging in plenty of conversations about college savings and estate planning.
Worth, important subjects to be sure, but the financial advice industry often glosses over the financial implications tied to the first 18 years of a child’s life. By some estimates, adjusting for the recent uptick in inflation, one child could result in annual parental expenditures of roughly $17,000. Assuming inflation stays static (it won’t), one child will cost parents $306,000 from birth to 18.
That’s a significant amount of money and those figures don’t include costs related adoption or conception. Nor do they include any costs not covered by health insurance for the delivery of the child at a hospital. In plain English, being a parent is expensive, but that also means many parents, particularly those with young children, need and want advice and guidance from a financial professional.
Building Foundations for Parenting-Related Finances
It may sound prosaic and it’s not the most glamorous pursuit an advisor will engage in, but helping parents with budgeting is a practical starting point. It’s a “necessary evil” for parents and one that has the potential to endear advisors to those clients.
“Encouraging your clients to work with a financial professional sooner rather than later can help prepare them for the financial burden of parenthood. Helping your clients build financial security before starting a family can also be beneficial—going into parenthood with a strong financial base that includes an emergency fund, little to no debt, and potentially banking products, life insurance and retirement savings can provide more confidence and less uncertainty,” according to Nationwide.
In addition to budgeting and as noted above, healthcare is another major expense for parents, even if they have insurance through their employers. With that in mind, health savings accounts (HSAs) are fertile territory for advisor/client interaction.
“An HSA allows your clients to save money pre-tax to use for deductibles, copayments, coinsurance, and other direct purchases of qualified medical expenses,” adds Nationwide. “However, your clients will only qualify for an HSA if they have a High Deductible Health Plan (HDHP). For plan year 2023, the minimum deductible for an HDHP is $1,500 for an individual and $3,000 for a family, and those eligible can contribute up to $3,850 for an individual and up to $7,750 for a family.”
Tax Tips for Parents
In what amounts to good news, there are a slew of potential tax benefits related to parenting and those extend beyond the Child Tax Credit.
“Additionally, if your client does qualify for the Child Tax Credit, there are other tax credits they could qualify for, including the Child and Dependent Care Credit, the Earned Income Tax Credit, the Adoption Credit and Adoption Assistance Programs, and Education Credits,” concludes Nationwide.
Advisors should note to clients that there are protocols in terms of qualifying for the Child Tax Credit. Notably, a single parent’s annual income cannot exceed $200,000 and a married couple’s combined yearly income cannot exceed $400,000.