Financing Childhood: What financial professionals need to know to help clients raise children

Key Takeaways:

• It’s estimated that raising children in a middle-income family can range from $16,007-$17,141 per child annually.
• Raising a child can be expensive, but tools like Health Savings Accounts, college savings plans, Flexible Spending Accounts and child tax credits can help lessen the financial burden for clients.

Raising a child is expensive—according to data from the US Department of Agriculture (USDA), a child born in 2015 to a middle-income family would cost approximately $12,980 to $13,900 annually (depending on the age of the child). ¹ BY 2022, inflation adjustments boosted those costs by 23%, ranging from $16,007 to $17,141 per child.² Those annual costs do not even include the costs of labor and delivery bills, nor do they take into account any fertility treatments, surrogacy, or adoption fees many people will also incur to expand their families.

Child-care, housing, education, food, clothing, and other items needed to raise a child quickly add up. Creating a plan for the costs of parenthood can be important to discuss with your clients who plan to raise children. Below we’ll share some tips for new parents that you can share with your clients:

Budgeting

Although budgeting can be an important part of anyone’s financial plan, for clients with children, it can be especially helpful to track expenses prior to, and once welcoming a child into the family. 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. Financial security will mean different things to different clients, but in general, it can be beneficial for your clients to feel financially secure before taking on the financial challenge of parenthood.

Managing Health Savings Accounts (HSAs)

According to the KFF Health System Tracker, its estimated that pregnant women of reproductive age (ages 15 to 49) enrolled in large group health plans incur an average of $18,865 more in health care costs than women who do not give birth. This additional health spending associated with pregnancy, delivery, and post-partum care includes both the amount paid by insurance (an average of $16,011) and that paid out-of-pocket by the enrollee (an average of $2,854). ³ This does not include the potential costs of fertility treatments or surrogacy fees that some families need to have a child.

Add to those initial costs the ongoing medical care for a child as they age. These costs vary wildly depending on the family, but in many cases, a Health Savings Account, or HSA, could be an option for your client to lessen the burden of health care costs. An HSA allows your clients to save money pre-tax to use for deductibles, copayments, coinsurance, and other direct purchases of qualified medical expenses.⁴ 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.⁵

Some health insurance companies will offer HSAs as an add on to their individual HDHPs, while some employers will offer them to their employees and even make contributions on their behalf. Other financial institutions may also allow your client to open an HSA independent of their healthcare plan or employer.

Dependent Care Flexible Spending Account

Dependent Care Flexible Spending Accounts, or DCFSAs, are pre-tax benefit accounts used to pay for eligible dependent care services such as preschool, summer day camp, before or after school programs, and daycare.⁶ This type of account is typically only available to clients whose employers offer the benefit—and like HSA accounts, there are limits to how much can be contributed and what is considered a qualified expense. For 2023, the DCFSAs have a contribution limit of $5,000.⁷

If your client qualifies for this type of FSA, they will pay into the account each pay period, but instead of using that money directly, they will pay out of pocket costs and then apply for reimbursement. This type of account can be attractive to those wanting to reduce their amount of taxable income and who have children who still require childcare.

Cost of Child-Care

The cost of child-care can vary greatly based on where your client lives, but the national average cost from a 2020 “Demanding Change” report was $10,174, which represents more than 10% of the average median income for a married couple, and more than 35% of the median income for a single parent.⁸ Child care may very well be your client’s biggest expense when it comes to parenthood, and prices will vary based on the city, state, and other factors such as the need for specialized care.

Since the rising cost of child-care can be such a large expense, it can be an important factor when budgeting and planning for a child. So you may want to help your client research the prices in their area.

Saving For College

In general, the earlier a client can begin saving for their child’s college, the better. There are different college savings accounts to choose from that parents can open to help pay for tuition and other college related expenses. 529 Plans, Coverdell Savings Accounts, and UGMA & UTMA accounts are options that your clients can utilize to help save for their child’s college expenses. The type of college savings account they choose will depend greatly on their preferences and financial situations, as well as the qualifications of the account. For example, these plans vary by state, and not all states will offer each plan. Further, some plans are stricter in what educational expenses may be reimbursed, like 529 plans and Coverdell Savings accounts, whereas UGMA & UTMA accounts can offer more flexibility.

Claim Child Tax Credits

When your clients have children, they may be able to claim the Child Tax Credit. Clients will be able to qualify for the full amount if they meet all eligibility factors and their annual income is no more than $200,000 for a single filer, or $400,000 if filing a joint return.⁹ Your client may want to speak with a tax professional if they have any questions regarding qualifications for the tax credit; some parents or guardians with a higher income may be able to claim partial credit as well. 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.¹⁰

Life Insurance

If your client is starting a family, it might be a good time for them to buy life insurance. In general, the younger and healthier that you are, the better rate you can get. If your client were to pass away prematurely, life insurance proceeds could be used by the surviving spouse to pay for things like child-care or college expenses. Additionally, life insurance money can provide funds for spouses to take off work and/or adjust their own work schedule to begin caring for their children as a single parent. The money can also be used to prevent a decline in their standard of living if the death causes them to go from two incomes to one. Although it can be difficult to talk about for some clients, having a contingency plan in the form of a life insurance policy for their spouse (if applicable) and child can help give them peace of mind.

Conclusion

Financially preparing for a child can be difficult, but it’s important to plan for the costs and take advantage of all the options available to parents, such as opening an HSA account, saving for college through tax-advantaged plans, researching child-care, and claiming child tax credits.