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3 Tax Considerations if Leaving California
January 12, 2022
You recently had a baby — congratulations!
Now you have childcare to juggle, at least four loads of laundry at all times, one doctor appointment to reschedule again, that dental work you’ve been avoiding, and approximately 167 other items on your parenting to-do list. Kudos to you for finding the time to read this article!
Being a parent is overwhelming, and the last thing you need is to add to your never-ending list of to-dos. But whether you are just starting your family or adding another child to your existing brood, there are important things to do to prepare financially for a new baby. Read further for the most essential steps to take within the first few months of adding children to your family that will give you peace of mind, help plan for the future, and save you time and money later.
A 529 plan is a powerful education savings vehicle — but only if it’s put to work early. All distributions are tax free if used for qualifying college expenses. Up to $10,000 for qualified K-12 education expenses may also be federal tax free (and in some states, state tax free) each year.
Did you know that many 529 plans can accept automatic payroll contributions or transfers from your bank account? Set up a recurring transfer once and remove it from your list for a while. An annual raise or bonus is the perfect opportunity to get started.
Note that 529 plan contributions count against the annual exclusion limit for gifts, which increased to $16,000 per person in 2022. So if you can afford it, consider super-funding your 529 plan contributions. Take advantage of the special rule that allows individuals to contribute up to five times the annual gift exclusion in a single year. This means a couple may be eligible to contribute $160,000 in one year. Some families find that a one-time upfront contribution is enough to satisfy their education savings goals.
A financial advisor can help you determine how much to set aside. And many financial websites offer basic education-planning calculators. Take care not to overfund the account, as the use of funds for non-qualified expenses will result in hefty taxes and penalties. Should you end up with excess funds, the IRS does allow beneficiary changes to eligible family members.
In the age of Amazon Prime two-day shipping, Instacart, Shipt and GoPuff, it’s hard to resist the allure of instant gratification. These services make it easy for your shopping cart to grow with wild abandon with the niftiest things for your little tyke. But these apps can be particularly dangerous for parents who have limited time to go to a store to shop.
Before adding that item to your shopping cart, walk away and revisit it later in the week. Chances are, you may lose interest or learn more and find out the item isn’t worthwhile. Or maybe you’ll find it cheaper elsewhere.
Consider that every item you purchase may actually soak up more of your time. Will that new toy become yet another item for you to pick up five times a day? Does more children’s clothing just mean more to organize and eventually find storage or a second home for? Will your child quickly get bored of this item and begin to expect a new one to replace it? How much time or energy has been spent hunting for “lost” toys that are just buried under a sea of other toys? And how much time and energy have you spent simply shopping for this item? The true cost of every purchase you make goes way beyond your wallet.
One way to find baby items for less or get rid of what you no longer need is by joining an online community group. Portals such as Buy Nothing and Freecycle have exploded in popularity, and it has become easier than ever to find new or gently used children’s gear for free.
As a member of these groups (search for your local group to join on Facebook), you can express interest in receiving items others post, or post items for others to pick up, free of charge. It also removes the worry that your child will outgrow or tire of your purchase. These groups make finding a second home for that stuff your kids no longer use extremely easy. You won’t get a tax deduction for donations like you might receive from Goodwill or The Salvation Army, but on the flip side, you never have to leave your door to give back to your local community.
Okay, it’s really your loved ones who will benefit from an update to your insurance and estate plan. But imagine for a moment how much more stress, time and money will be exhausted by your loved ones if a plan is not in place when the unexpected occurs.
Great job if you’ve diligently updated these items. If you haven’t, you’ll want to start with a will identifying who will be the guardian of your minor children if the unthinkable occurs. In many states, it’s also advisable to create a living trust, which will allow your heirs to avoid probate and specify who (and when and how) will receive your assets upon your death. The will should also dictate how assets not in your trust will transfer and appoint an executor of your estate. Finally, consider power of attorney and healthcare directive documents. Keep in mind, laws vary state by state, so consult with a local estate planning attorney for advice and to create these basic documents.
Take a moment to consider the amount of time and money you’ve spent building your assets and caring for your loved ones. Honor all of your past hard work and sacrifices with the additional step of protecting it. To avoid being over-insured, consider term life insurance for a specific period of time. A trusted financial advisor can help you determine which type of policy and how much coverage you need, based on your financial goals.
Finally, be sure to review the beneficiary designations on your retirement accounts and insurance policies each time your family changes. In almost all cases, these beneficiary designations will supersede any wishes written in your estate plan documents.
It’s no surprise that estate planning and insurance needs are often pushed to the bottom of parents’ checklists. The good news is that the financial planning and legal work that used to take place primarily in person can now be conducted virtually.
Once you have everything in place, have you communicated your intentions with everyone involved? Will your loved ones know where these important documents are stored? Be sure to talk to those closest to you about your plans for your family’s future. These steps are as critical as setting up the plan itself.
After children arrive, it’s easy for your long-term financial plan to be put on the back burner! Now is the time to update your existing financial plan or to create one with a trusted advisor. This will help you answer questions like:
A financial plan acts as a guide to take you through life’s journey — and there is no better time than the expansion of your family to update this living, breathing plan. You’ll sleep better having a wealth manager to help ensure you’re on solid financial footing. And with 3 a.m. wake-ups, you need all the help you can get.
Having a baby is an exciting change that comes with a load of responsibilities. So take a deep breath, catch that elusive catnap, and tackle the things that will make your life easier one at a time so you can truly enjoy the new love in your life.
(Daniella Chuckran, Aspiriant director of marketing and partner, contributed to this post.)
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