Baby on the way?

529 college savings plans: savings vehicles, sponsored by states and colleges, which offer tax advantages to people using the vehicles to build funds for higher education.

Child tax credit: a tax credit that may be worth as much as $1,000 per qualifying child depending on your income. A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship and residence.

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Having a baby is an exciting, life-changing event. Financially speaking, it’s also a large undertaking.

According to a 2011 report by the U.S. Department of Agriculture, it will cost middle-income families $226,920 to raise a child to age 17.1 That includes such expenses as a home, food, clothing, transportation and other essential items. However, private education and college tuition – which could mean taking care of your child past age 17 – are not factored in the equation.

Following are some ways you can ensure that the cost of bringing up baby won’t rock the boat – or the cradle—too hard.

Run the numbers.
If possible, work with your spouse or partner to develop a budget before you decide to start a family. Find out how much childcare, diapers, furniture, formula and other baby essentials cost in your area. Add them to your current expenses and calculate your combined income. Project how your budget will work once the baby’s born. Revisit your budget regularly and keep it up-to-date.

Weigh your options.
If you’re contemplating staying home with your baby, think about how much it would affect your family’s income and expenses. Weigh them against the average cost of childcare in your area. As you work through the numbers, don’t forget about expenses you can eliminate from your budget by not going to work, such as eating out for lunch, commuting costs and dry cleaning.

Save, save, save.
It’s important to have savings accumulated for emergencies. A general rule of thumb is to have enough cash set aside to cover at least six months’ worth of living expenses.
That way, if the unexpected happens, such as you decide to extend your maternity leave or there are extra medical bills to pay, you will still have enough to meet your monthly expenses and can continue saving for long-term goals.

Retirement takes priority. You can borrow for big-ticket items such as college, but you cannot borrow for retirement. Take a set amount of money out of each paycheck and invest it in a retirement savings account, such as an Individual Retirement Account (IRA) or your employer-sponsored 401(k). Once invested, your money will generate earnings, making more money. The earlier you start, the more time you give your money to grow.

Saving for college: Your friends might say that you need to start saving for your children’s college education as soon as they are born. Given that college costs have risen some 40% over the last decade, they may have a point. But it might be unrealistic to start saving for college when you’re still paying for daycare. Most people simply can’t start saving for college until their child is in kindergarten or later. However, if you’re ready to build college savings, here are a couple of options:

Start by looking at "529" plans, sponsored by states and colleges. These are college savings accounts with tax advantages, including federal and state tax-deferred growth, federal tax-free earnings if you withdraw money to pay for college, and, in some states, an annual state tax deduction for your contributions. If you don’t end up using it for your child’s education, you can transfer the 529 account to any eligible family member. Additionally, 529 plans often make a great gift from grandparents looking for a way to contribute to your bundle of joy!

Although mutual funds are funded with after-tax money and are taxed every year, they can also be a good way to invest and save, especially if you’re not sure you want to dedicate your savings strictly to education via a 529 plan. This way, withdrawals from your account can be used for any purpose.

Insure yourselves.
Having health and life insurance can be the difference between financial stability and financial distress.
They can insulate your family from skyrocketing costs while you continue to meet your financial obligations and save for long-term goals. If you do not have health insurance through your employer, inquire about health insurance companies at your state insurance department – as giving birth to a child while uninsured is not a good way to move forward.

Similarly, you may want to consider life insurance in the event of your or your spouse’s death. While not pleasant to think about, life insurance provides a tax-free lump sum to your survivors in the event of your death. While your employer may offer a specific rate for life insurance, it is recommended that both you and your spouse or partner each own at least 10 times your annual salaries in protection (in addition to whatever amount your employer may be offering). But as with any personal financial activities, the appropriate amount of insurance for you depends on your needs and personal circumstances.

Speak to your employee benefits department to make sure you have a clear understanding of the type of life insurance that may be offered through your employer. Then, if necessary, consult with two or three insurance companies to help you decide what kind and how much insurance coverage you’ll need. Then compare them to see which will work best for you.

Become tax-savvy.
Once baby is born you can now claim him or her as a dependent on your taxes. You will receive a “child tax credit” and may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17. Just make sure you get your baby a Social Security number. In addition, check into these potential tax benefits:

Flexible Spending Accounts: Find out if your employer offers a flexible spending account, which can allow you to set aside up to $5,000 in pretax income to pay for qualified childcare and healthcare expenses. Depending on which tax bracket you are in, using these accounts can save you thousands of dollars a year. Just one word of caution: You will lose any money that you don't use for childcare on healthcare expenses by the end of each year. Be certain that you’ll use all of the money before you deposit it.

Childcare credit: For every dollar you spend on childcare (up to $3,000 for a single child or up to $6,000 for two or more children) you can reduce your taxes by a certain amount. The amount of the credit varies from 20% to 35% of what you pay for childcare, depending on your gross income (your income before taxes and withholdings). Families with gross income of $43,000 or more get a 20% credit, while families earning $15,000 or less get the full 35% credit.

However, the IRS doesn’t allow you to use the flexible spending account and the childcare credit at the same time. You’ll have to do the math to see which method saves you more money.

Move forward.
While your financial responsibilities greatly increase when you bring a child into the world, through careful financial planning, budgeting and investing, you can have peace of mind, sit back and take in the joys of parenting.

Need more information?
Visit for broader Financial Education, including a variety of resources to help you improve your financial well-being.


1 United States Department of Agriculture (June 2011). Expenditures on Children by Families.

While it is not our purpose or intent to provide specific investment advice or financial planning services, the above information may be helpful in understanding financial issues relating to having and raising children. We urge you to seek advice based on your own particular circumstances from a financial advisor.

The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., distribute securities products.

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