By Cynthia Measom, GoBankingRate featuring Julia K. Pham, CFP®, AIF®, CDFA®, Wealth Advisor at Halbert Hargrove
Modern family financial needs and arrangements require fresh approaches to financial planning, which has forced financial advisors to throw out their old playbook. With new financial strategies in play, parents and parents-to-be have a compelling reason to seek professional advice and strategies that address their unique needs.
Parents need a financial advisor now more than before because most, if not all, of the conventional financial wisdom that is generously dispensed by friends and family is based on the old playbook. Here are just a few reasons why you need a financial advisor.
1. Managing Child Care Costs
Many parents struggle to make ends meet due to expenses growing to match whatever income one might earn. According to the 2021 Cost of Care Survey by Care.com, child care is not in the affordable range for the majority of families. Of the parents surveyed, over 85% said they are spending 10% or more of their household income on child care expenses and 57% spent over $10,000 on child care in 2020.
How a Financial Advisor Can Help
Financial advisors can help find ways to leverage the tax code to your advantage by helping you arrange your finances so that you maximize your ability to qualify for tax breaks and credits offered to parents. Examples include the earned income tax credit, the child and dependent care credit and the child tax credit — to name just a few.
“Far too many parents that I talk to don’t realize that they qualify for the child and dependent care tax credit,” said Corey Noyes, financial advisor and owner of Balanced Capital. “This can get you up to $4,000 of child care costs returned on your tax forms.”
Thankfully, the tax code is child-friendly. In addition to the child and dependent care tax credit, here are just a few ways being a parent can pay at tax time:
- If you’re having a baby before the end of the year, you can adjust your withholding now and use the extra cash to save for the new baby.
- Don’t forget the child tax credit. Depending on your income and your child’s age, you can receive a tax credit of up to $3,600 per child.
- Families with earned income might be eligible for the earned income tax credit, which is one of the most valuable tax credits available to families with low to moderate income.
2. Paying for College
You may be tempted to tap your retirement savings while still working to help fund college tuition. Some employer-based retirement plans, however, restrict access to retirement funds while an employee is working for the company.
Perhaps worse, assuming you can access the funds in your employer-sponsored retirement account, you must now contend with taxes. A serious and often overlooked tax trap is created when a person withdraws funds from a tax-deferred retirement account, thus triggering an increase in his marginal tax rate together with a decrease in or elimination of certain deductions. The additional taxes can be so significant that the needed withdrawal is cost-prohibitive.
“Retirement should always be the priority over saving for your child,” said Graves. If you don’t ensure you have a secure financial future, you will be putting a huge potential burden on your children. Your kid(s) can always borrow money for a college education, but you can’t borrow money to retire.”
How a Financial Advisor Can Help
A financial advisor can help parents or parents-to-be diversify retirement savings so that not all of their retirement money is held in their employer-sponsored plans. This type of diversification can also offer significant tax advantages by giving you the ability to manage your withdrawals among different types of accounts based on your tax situation at the time.
Your financial advisor can also help you set up a 529 college savings plan, which is a flexible, tax-advantaged account that allows you to save money for your child’s qualified education expenses. Qualified expenses include a wide variety of college expenses at accredited schools in the U.S., student loan repayments, tuition expenses for students in grades kindergarten through 12th and some apprenticeship costs.
3. Helping Your Children Become Financially Literate
Only 21 U.S. states require students to take a course in personal finance, according to the Council for Economic Education’s 2020 Survey of the States. And it’s never too early to start teaching your children about finances.
“Starting basic conversations with young kids means they will better understand the value of money and make complex discussions easier to understand as they get older,” said Julia Pham, a wealth advisor with Halbert Hargrove. “It will also make them more likely to invest in their own future and be financially stable when they enter adulthood.”
How a Financial Advisor Can Help
“One way to educate your kids about finances is to include them in a meeting with your financial advisor,” said Ryan Graves, CFA and president of Bemiston Asset Management. “Most advisors will consider this part of the existing relationship, so they will not charge for it. You can set the scope of the meeting with your advisor beforehand if there are some things you’d like to be kept private. Helping your child(ren) understand how savings and finances work from an expert will help set them up for success, especially when it comes to planning college education and student loans.”
4. Paying for Private School
Some parents choose private school, which requires tuition payments.
“I look at paying for private school in two categories: special needs children, and non-special needs,” said Noyes. “If you have a child with special needs, there are several grants and programs available through most states to help pay for the cost of a specialized education.
“If your children do not have special needs, you won’t be able to find those grants, but you may be able to qualify for scholarships through the school. I also remind parents of non-special needs children that while private school may seem like a shiny alternative to public school, there isn’t a whole lot of data to support that private school children achieve greater success in life. If it’s something you want to do and can afford, great. If not, don’t put yourself into debt for it.”
How a Financial Advisor Can Help
A financial advisor can offer options of how to manage the cost of private tuition, including options that many people don’t consider, such as a 529 plan. Even though a 529 plan is normally thought of as a way to fund a college education, up to $10,000 annually can also be used to fund tuition for students in elementary, middle or high school at private, public or religious schools.
If you’d rather not use the 529 plan for elementary through high school private tuition and reserve it for college expenses, you could opt for a Coverdell education savings account.
A financial advisor can also help you reduce your tax liability. Here are some examples:
- Your state may allow you to claim private school tuition as a way to reduce the amount of state tax you’ll owe.
- If your child has special needs and qualifies for specialized private education, you may be able to deduct the cost of private tuition, plus any tutoring or training your child may require, on your tax return.
5. Managing Household Expenses With Inconsistent Income
In 2021, U.S. workers have been quitting their jobs in record numbers, and some of those people are choosing self-employment.
One of the most significant issues that self-employed parents face is managing household expenses with an inconsistent income, such as when clients do not pay on time. Even though a financial planner isn’t likely to be able to make your clients pay, he can help you manage the financial realities of self-employment.
How a Financial Advisor Can Help
Financial planners, and CPA financial planners in particular, can be of great help to people who are self-employed. Financial planners can help self-employed parents and parents-to-be by using statistical data and mathematical models to predict future income. A financial planner can then help you use this information as a foundation for your household budget. The end result is a much less stressful life.
A financial planner can also help you manage your finances to minimize self-employment taxes. As a self-employed parent, you have far more tax-planning opportunities than your traditionally employed friends. A financial planner can help you make the most of all of these advantages.
Your Financial Plan Will Change Along With Your Family
The key to successfully navigating the new challenges that come along with having kids is to seek the advice of an experienced financial advisor along the way. As your family grows and changes, your advisor can help you take advantage of new ways of managing your financial obligations, which can help set up you and your family for success.
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