Investing for Baby

One of the bazillion (yes, I made that up) things I’ve been thinking about is what financial steps we should be taking to prepare for our baby. We’ve already made the obvious choice of spending less and saving more now while I’m pregnant, but we were pretty good savers before, too. But I know there are different savings vehicles, such as 529 plans for college saving, brokerage accounts and savings bonds. But then we have to think about our insurance needs, both medical and life, and beneficiary selections.

The grandparents are very excited on both sides, of course. But if I’m asked if we need anything, we’re going to tell them to start savings accounts for their grandchild. By the time our little one is ready for college in 2028 or so (wow, frightening to see that year in print), the now-expensive tuition will be astronomical, so every little bit will help. One online calculator estimates we’ll need $300,000 saved to send our child to a 4-year college! That’s on top of saving for both of our retirements in another 36 years or so, assuming we could retire at 67.

Saving for College

Savings Bonds — These tried-and-true savings vehicles take time to mature, but if you start early, you’ll help your child pay for college. They’re a good option because you don’t have to pay taxes on the interest if they’re used to pay for higher education. Backed by the U.S. Treasury, there are two types. Parents can buy up to $10,000 in Series EE and I bonds per year — $5,000 in paper bonds and $5,000 in electronic bonds.

• I Bonds — Purchased at full face value, I bonds accrue interest monthly at a fixed rate, compounded semi-annually. There’s also a “bonus” semi-annual inflation rate, announced each May and November. These types of bonds accrue interest for 30 years.
• Series EE Bonds — These bonds work a bit differently. Series EE bonds are bought at 50% of the face value, meaning you pay $50 for a $100 Series EE bond. The interest rate is tied to market value, and therefore, it takes varying amounts of time for them to mature. The catch here is that you have to cash in the bonds in the year they mature or else be faced with fees and penalties.

529 Plans — This higher education savings vehicle can be used for tuition, room and board, fees, books and supplies, but money in these plans can’t be used to pay student loans. Contributions are made post-tax, but some states may allow for the contributions to be deducted come tax time. An advantage of the plan is that while the account is held by the person who started it, anyone can make contributions — grandparents, aunts, uncles, friends. Also, earnings on the account are tax-free when used toward college costs.

UMGA/UTMA Custodial Accounts — Acronyms for the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, UMGA and UTMA accounts are held and managed by parents or guardians in trust for the beneficiary, a minor child. When the minor comes of age (18 or 21 depending on state of residence), they fully inherit control of the funds in these accounts. These funds can be used for any expense, not just college tuition and related costs. But the tax benefit of these accounts is negligible — while the tax liability is shifted to the child, they may still be in a higher tax bracket when they receive full ownership of the funds in the account.

Taxes

Adjusting Withholding — Currently, we both claim “zero” on our W-4 forms to offset the extra income I bring in through freelance work, on which I pay taxes. But now that we own a home, we don’t need our employers to take that much money out of our paychecks every week, thanks to deductions on mortgage interest and property taxes. And with a baby, we could claim 3 exemptions — ourselves and the little one. It’s also a fair guess that I’ll be doing far less freelance writing for a while!

Insurance

Medical insurance — We’ll be adding our new addition to the health insurance we have through Mr. Saver’s employer, but the paycheck deduction will increase because we’re going from employee+spouse to an employee+family plan. There’s nothing we can do about this; the little one needs coverage, too!

Life insurance — We have yet to purchase life insurance, but now might be the time to look into a term life policy. We want to provide for the surviving spouse and our child in case something happens to one of us.

We know how important it is to provide for our child, and we hope to look into these ways of helping invest in our baby’s future. Are there any other finance-related areas we should be thinking about?