Starting a family can be one of the most rewarding experiences of your life. On top of new responsibilities for your child’s physical and emotional wellbeing, it is important to think about their financial wellbeing early. Get a head start with a solid financial plan to set up your new bundle of joy for long-term financial success.
1. Setup financial accounts for your child.
530A Trump Accounts
The One Big Beautiful Bill Act of 2025 introduced a new account aimed at helping build long-term savings for America’s youth. Accounts can only be established for U.S. children under age 18 with a valid Social Security Number.
U.S. citizen children born between January 1, 2025 and December 31, 2028 are eligible for a one-time $1,000 federal grant. Contributions can be made to the account until the child turns 18. The maximum annual contribution is $5,000 which includes contributions from all sources (individuals, employers, charities, etc.). Contributions are not tax deductible.
No account withdrawals can be made until the child turns 18. At age 18, the account converts to an IRA and then IRA rules apply. Under the current IRA rules, funds can be withdrawn from your IRA to cover certain qualified expenses such as education and a first-time home purchase. The withdrawal is subject to income taxes, but not subject to a 10% early withdrawal penalty. Withdrawals that do not meet the stated exceptions are subject to both income taxes and a 10% early withdrawal penalty. Once the account is converted to an IRA, the normal contribution rules apply for tax deductibility.
To open an account, you can sign up online with your IRS.gov account or prepare and submit IRS Form 4547.
529 Plans
A 529 plan is a tax-advantaged education savings account. Each plan is sponsored by an individual state but you don’t have to be a resident of a state to invest in their plan. While contributions into a 529 plan are not Federally tax-deductible, the growth in the 529 plan account is tax-free when used for qualified education expenses. Additionally, contributions to the account are not limited to income or age and there is a large max contribution per beneficiary set by the state (typically between $250,000 and $500,000).
Qualified distributions include the following:
- Higher education expenses at eligible institutions including tuition, room & board, books, supplies, approved equipment and fees
- Up to $20,000 annually per beneficiary for private K-12 education tuition
- Up to $10,000 repayment of student loans per person
Some states have a state-level tax benefit when contributions are made to their 529 Plan. An account can be established by anyone (relation is not required) for the benefit of another. The account owner controls how the funds are invested and distributed on behalf of the beneficiary. This allows the account owner to maintain control even after the child reaches the age of majority.
Custodial Accounts
Custodial accounts are another valuable financial planning tool in your toolkit. A custodial account is an account setup by an adult for a minor such as a checking account, savings account or brokerage account. Funds contributed to a custodial account are not tax-deductible and are considered a gift from the parent to the child when the deposit is made. While the child is a minor, the parent makes all investment decisions for the benefit of the child.
Advantages of a custodial account are:
- Vast range of investment choices
- Funds can be used for any purpose (not limited to education)
- Funds can be withdrawn at any time without penalties
- The first $1,350 of account earnings are generally exempt from Federal tax (in 2026)
- Unlike retirement accounts, earnings from brokerage accounts can be eligible for the lower capital gains tax rate for qualified dividends and long-term capital gains
Disadvantages of a custodial account are:
- When the child reaches the age of majority, they have complete control over the account (this is typically 18 or 21, depending on state law)
- There is no oversight over how the funds can be invested/used
- Assets in the name of the child will be considered for college financial aid
- Account earnings from a brokerage account may be subject to kiddie tax at the parent’s tax rate if over the annual earnings threshold ($2,700 in 2026)
2. Update tax forms.
Adding a dependent to your tax return typically results in a different tax outcome if you are eligible for the child tax credit, dependent care tax credit and state benefits. You can update your payroll tax withholding forms to reflect the change in your tax situation to consider the additional dependent and reduce your tax withholding throughout the year. Federally, you will update Form W-4 and submit with your employer. State withholding election forms vary by state.
3. Review employer benefits.
You can finally take advantage of some of your employer’s benefits with the birth of your first child. Within 30 days of the child’s birth, they should be added to your health insurance. Their birth is considered a “qualifying event” that does not need to be delayed until open enrollment. Then, consider the following during open enrollment based on your new family costs:
Dependent care flexible spending account (DCFSA)
A dependent care FSA is a pre-tax account that can be used for daycare or preschool costs when both spouses are working. You can contribute up to $7,500 for a couple or $3,750 single for 2026. For the contribution to remain on a pre-tax basis, both taxpayer and spouse must have earned income of at least the contribution amount.
Health savings account (HSA) or Health flexible spending account (FSA)
An HSA and an FSA are both pre-tax accounts that can be used for medical expenses. With a new dependent, you’ll likely have increased medical costs and these accounts allow you to use pre-tax dollars for those new expenses. There are a few differences between these account types. FSAs are owned by the employer and the funds are “use-it-or-lose-it.” HSAs require a high-deductible health plan and funds contributed can grow annually and be invested. Both have different annual contribution limits.
4. Update your insurance coverage.
At every major life milestone, you should evaluate your disability and life insurance coverage. Disability and life insurance can be thought of as “income replacement.” Preparing for the worst-case scenario may be grim but it’s an important part of your financial security and should be evaluated closely.
A good rule of thumb for disability insurance is to replace 60%-70% of your after-tax income. Disability insurance payments are typically paid with after-tax dollars so the payments received are tax-free. A family making $200,000 per year should have disability coverage of about $140,000 per year.
A good rule of thumb for life insurance coverage is to have a policy worth 10 to 15 times your annual income. A family making $200,000 per year should have a life insurance policy of about $2,000,000.
In addition to evaluating your coverage, you should also review your life insurance policy beneficiaries. Consider including your new dependent as either the primary beneficiary of the policy or a contingent beneficiary.
5. Update important documents.
Upon the birth of your first child and future children, you should update legal and financial documents to take them into account. Fortunes have been lost due to failure to update financial documents timely.
Update your Last Will and Testament to consider the birth of your child including naming a guardian for their benefit and considering them in the inheritance of your estate.
Review beneficiaries named on your retirement accounts such as an Individual Retirement Account (IRA), 401(k) Plan, 403 (b) Plan and others. Consider updating your child to the primary beneficiary or contingent beneficiary for these accounts based on your wishes.
6. Protect from financial fraud.
Unfortunately, children’s identities are at risk from birth. As soon as a social security number is issued for your child, they have a credit profile that can be used by thieves to fraudulently open credit cards/loans, claim government benefits, file tax returns, etc.
To protect against this type of fraud, you can place a security freeze on your child’s credit. A credit freeze prevents others from using their credit and restricts access to their credit report. To complete this step, submit a request through the three major credit bureaus: Equifax, Experian, and Transunion.
Welcoming a new baby into your family is a life-changing experience, but it doesn’t have to be overwhelming. Starting early and being intentional about your financial choices can pay long-term rewards for your family’s legacy.
