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If
you have just had a child, you are no
doubt excited and happy, though you
could probably use a little more sleep.
And if you are like most new parents,
you have big dreams for your little one.
But to help make those dreams come true,
you need to make the right financial
moves. And the best time to start is
now.
To begin with, you need to
evaluate your life insurance. When you
first started out in the working world
and you were only looking after
yourself, you probably did not need a
whole lot of insurance. After you
married, though, you wanted enough
insurance to at least help your spouse
pay off your mortgage. And once you have
children, you will add a new dimension
to your life insurance needs, because
you want to have enough coverage to
educate your kids, and perhaps set them
up in adult life.
How much insurance does that
take? There is no one right answer for
everyone. You will have to consider a
variety of variables, such as your
spouse's income, how many children you
have, what type of college you would
like them to attend and how much you
would like to give them to begin their
working lives.
Beyond obtaining enough
insurance, what other financial moves
should you make upon the addition of a
child? Consider setting up a college
fund. As you may know, college has
become quite expensive in recent years.
In fact, for the 2006-2007 school year
it costs, on average, $16,357 for
students attending four-year public
colleges and universities, according to
the College Board. If college costs were
to rise 5 percent every year, today's
newborns can expect to pay about
$162,000 for four years at a public
school. In short, you have quite an
incentive to save for college.
In building a college fund,
the earlier you start saving, the
better. Fortunately, you have some
attractive savings vehicles available,
such as a Section 529 plan or a
Coverdell Education Savings Account,
both of which can offer tax-advantaged
ways to save for college. To determine
if these plans are suitable for your
needs, consult with your financial and
tax advisors.
In addition to a college
fund, you may want to open a separate
investment account for your new child.
You can set up a custodial account as
established by either the Uniform Gift
to Minors Act (UGMA) or the Uniform
Transfers to Minors Act (UTMA). In an
UGMA or UTMA account, the first $850 of
annual investment income is tax-free to
a child under 14, and the next $850 is
taxed at the child's rate. Any amount
over $1,700 will be taxed at your rate.
Keep in mind, though, that once you make
a gift to your child, it is irrevocable,
which means you no longer have any legal
access to, or authority over, the funds.
Before proceeding with an UGMA or UTMA
account, make sure to consult with your
tax advisor.
When you have new children,
you have a lot to think about. Just make
sure one of the things you're thinking
about is their financial security.
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