Money milestones: going back to work after having a child
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There’s no magic formula for new parents who are going back to work. Some parents may already be missing the time spent with their little ones, while others may be anxious to get back to work and have conversations with other adults.
Both feelings are equally valid. Regardless, you’ve got some financial issues to work out now that you’re rejoining the workforce.
“The first thing to decide is whether going back to work is the financially savvy decision,” which depends on the salary of the parents and if it’s feasible for one to stay home, said Laura Morganelli, certified financial Planner at Abacus Wealth Planners. “If you determine that it is the right move to go back to work there a few things to consider to make sure you set yourself up for an easy transition.”
Here’s what to do with your money when you go back to work after having a kid.
If there isn’t a parent to stay home with the child, coming up with the money to pay for child care is daunting. The average cost of daycare ranges from $9,000 to $9,600 per year per child, with costs far exceeding that amount in many areas of the country.
“The biggest expense to consider is the cost of child-care. Will you need to cover the cost of child care every day Monday through Friday or will you have help from family and friends?” said Morganelli.
Hopefully you’ve already located child care by the time you’re ready to head back to work, because finding an option that fits your budget can take time. If a state of the art center has excessive tuition or long waiting lists, consider an at-home daycare or sharing a nanny with another family. Your own family members may want to pitch in, but this can present its own set of challenges.
There are some resources that can help lessen the child care burden:
Dependent care flexible spending accounts (FSAs): Offered by some employers, these accounts let you set aside funds to pay for eligible child care tax-free, up to an annual limit (in 2020 the limit is $5,000 for individuals or married filing jointly and $2,500 for married filing separately). They require you to pay for your child care costs up front, then submit your expenses to the plan administrator for reimbursement. Make sure to save your receipts.
Child and dependent care tax credit: You can receive a tax credit for child care costs for kids under 13, up to $3,000 for one child or $6,000 for two children. This credit is taken off the top of your income and you won’t have to pay taxes on it.
Assistance programs: There are federal, state and local programs that provide child care assistance for low income families. Check out the federal Child Care and Development Fund first. You can also find your state program administrators through this directory. Be sure to research local programs through your county and city as well.
If a parent who previously worked is staying home to care for the child, the ensuing lost income can be challenging. If both parents are working, child care expenses can add a significant drain to any budget. And your earnings may have been lower or non-existent when you were staying home with your child.
No matter the situation, you need to adjust your budget when you go back to work. Make sure to revisit your monthly budget and adjust your expenses including diapers, baby food, groceries and more. Add a line item for child care costs and don’t forget to remove income if one parent is no longer working.
As you adjust your budget, consider how your lifestyle has changed. You may want to budget for quick and easy dinners at home instead of meals at restaurants, and focus on free or cheap local activities instead of concerts or ball games. If your money is tight, it’s time to look for opportunities to reduce or eliminate unnecessary expenses.
Don’t have a monthly budget for tracking income and expenses yet? You should. Use our monthly budgeting spreadsheet to get started.
When you started working for your current employer, you determined your W-4 withholding so the correct amount of federal tax is withheld from your paycheck. Having a child is a life event that can impact your tax obligations — you may qualify for the Child Tax Credit, the Child and Dependent Care Tax credit and more.
Leaving your withholding as is may result in a larger refund, but claiming an additional allowance for a dependent may allow you take home a bigger paycheck. In order to budget accordingly, more take-home pay could be the right move.
The birth or adoption of a child is a life event qualifies you for special enrollment — you can bypass open enrollment periods and make immediate adjustments to benefit plans. You may want to schedule a meeting with your employer’s Human Resources department to ensure you understand every option.
Common benefits you’ll want to change could include:
Health insurance: If you haven’t done so already, you need to get your child on your health insurance plan ASAP (many health insurance companies require you to add a new child within 30 days). Your plan should cover the baby’s delivery, hospital stay and follow up care. Make sure to factor in the current cost of your policy, the costs of higher premiums vs. higher deductibles and in-network vs. out-of-network restrictions. In some cases it might make sense to evaluate other plans.
Flexible spending accounts (FSAs) and health savings accounts (HSAs): These accounts let you pay for eligible medical expenses for yourself and your dependents tax-free (read here for the differences between the two). You may want to open an account or adjust how much you’re contributing to an existing account so that you can more easily afford medical costs.
Dependent care FSAs: If you incur child care expenses from an eligible care provider, opening a dependent care FSA is a no-brainer. It will let you pay for child care expenses, up to an annual limit, tax-free.
Life insurance: If you receive life insurance coverage through your work, find out if you can increase that coverage or what other options you have.
In many cases, any life insurance coverage provided through your employer won’t be sufficient — and you may want to additionally opt for a private policy. The amount of coverage you need depends on your income, expenses and how many children you have, but you’ll likely want at least 10 to 15 times your salary. You may need to open a new policy or adjust your existing one to make sure your family is taken care of if you should pass away.
Don’t forget to update your plan beneficiaries when needed. For certain plans and policies, adding your child as a beneficiary will cut down on red tape, paperwork and even court proceedings should a claim need to be filed.
Worried about how your child will afford to go to college? Going back to work is the perfect time to open a 529 college savings plan, which lets you set aside funds tax free. Your child will be able to draw funds for eligible education expenses including tuition, room and board, books, technology and more. Under the Tax Cuts and Jobs Act of 2017, parents can even use 529 accounts to pay for private K-12 education.
While saving money for college is a great idea, don’t shortchange your own financial goals, including building an emergency savings fund or saving for retirement. “You want to balance your short-term goals, such as paying for child care & saving for their college education, with your long term goals, such as setting yourself up for success in retirement,” said Morganelli.
Here are some tips on reducing child care costs.
Here’s how to set up a dependent care FSA through your employer.
Not sure what the right child care is? Here’s our breakdown of three options.
The W-4 has changed, so make sure you understand it before you update your withholding.
Image: Aleksander Nakic
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