New baby? No doubt this new arrival has turned every aspect of your life upside down in the best possible way. Now is the time to make sure your financial house is in order. Here’s a 10-step account and financial checklist to lay the groundwork for your little one’s successful future.
New account checklist for new babies
1. Apply for a Social Security number for the baby: An SSI number is the linchpin to open a bank account in your child’s name, purchase savings bonds, obtain medical coverage and access government benefits.
2. Review your life insurance: If you don’t have life insurance, you should get coverage as soon as possible. If you already have a life insurance policy, check to make sure it’s adequate to cover the needs of the new addition to the family.
3. Pick a guardian: Choose a family member or close friend who is willing and financially able to care for your child, should you or the other parent pass away or become incapacitated before your child turns 18.
4. Set up powers of attorney: Put in writing your legal power of attorney, which sets out who will be responsible for your financial and personal affairs should you be unable to make those decisions for yourself. You also should set up a health care power of attorney that makes your wishes known in the event you become seriously ill and are unable to participate in decisions about your care.
5. Write your will: It’s not just wealthy people who need a will. Every parent should create a document spelling out how his or her estate should be handled. The will may also include or reference legal guardianship and powers of attorney.
6. Open a savings account in the baby’s name: Choose a no-fee, no-minimum balance, online savings account. You can link the savings account to your checking for automatic withdrawals.
7. Set up an emergency fund: You should put aside money from each paycheck into a savings account with the goal of having sufficient funds to cover living expenses for six months.
8. Review your work benefits: Confirm how much paid (and unpaid) maternity leave is offered through the birth mom’s employer, and whether paid leave is available for the other parent. Determine how you will obtain health benefits for the baby, either through an employer or government plan. Consult with your human resources office on flexible spending accounts and other benefits that may apply to your situation as a new parent.
9. Check in with Uncle Sam: You can claim a tax credit of $1,000 for your new baby and take an annual tax deduction of $3,950 for each dependent child. You can also receive tax credits if you adopt a child and/or if you pay for child care. You should review your withholding status, which could mean that more take-home money is available to increase your emergency fund every month, for instance. Single parents may be able to claim head-of-household status.
10. Start saving for college: Set up a 529 savings account, which generally is not subject to federal and state taxes if used to pay for college tuition. (If the funds are used for other purposes, earnings may be subject to a 10 percent federal tax penalty.) Details on fees and other aspects of the 529 plans vary by state, so do your research.
The best high-yield online savings accounts offer strong interest rates and great customer service, making them a popular option for savers. Studies also show online savings accounts often come with lower fees.
“High-yield” is unfortunately a bit of a misnomer these days; a decade ago, interest rates were 4% and 5% among select savings accounts and money market accounts. Today, the best rates are around 2% while a fair amount are still hovering around 1% or more. This trend will continue until banks and credit unions need more cash from depositors.
Interest rates are important because money shouldn’t lose too much purchasing power. In a perfect world, interest rates offered by banks should beat inflation while preserving the balance without risk. I am not aware of any bank offering a savings option with ongoing interest rates high enough to beat inflation, whether measured by the government-reported CPI-U or by any other meaningful measure of consumer prices. Nevertheless, if your savings is at a brick and mortar bank earning below 0.25% APY, choose one of the better options below.
When evaluating customer service, there are two important factors to consider. The best banks offer all account maintenance and transfers through a professional, reliable, and easy-to-navigate website. Secondly, live customer service representatives should be knowledgeable, helpful, and available, although customers should have to deal with a representative infrequently if at all.
Based on my own experiences and reviews from other Consumerism Commentary readers, here are the most-recommended accounts for short-term savings. All of the listed interest rates directly below from our partners and in the table that follows are current but they are subject to change by the banks. Although I have nine accounts listed below the table of rates, you don’t need to have accounts with that many different banks. Choose one that fits you the best.
First, here is a list of the latest interest rates. Following this table, I offer a few of my own observations and opinions about savings accounts from nine popular online banks. Read the full article →
Families will be able to deposit funds into special savings accounts, called 529As, and earnings in these accounts will grow and can be withdrawn without any tax consequences. The annual contribution limit will start at $14,000, linked to the amount of the gift tax exclusion, and accounts can grow to $100,000 without being counted against qualification for Social Security benefits. The actual account maximum will be defined within each state’s regulations.
As long as the money withdrawn will be used to pay for qualified expenses, like housing, education, transportation, health care, and rehabilitation for the disabled beneficiary, these tax advantages will apply. This new account is a result of Congress passing the Achieving a Better Life Experience (ABLE) Act of 2014 and President Obama signing this bill into law.
Like 529 plans for college education, 529A plans will be managed by each state. This will provide another stream of revenue for the companies contracted by the states to provide these services, an economical benefit to organizations usually within that state. For an idea of what kind of fees consumers will see with 529A plans, you can see this chart that outlines current 529 plan fees on a state-by-state basis. There’s no reason to assume that 529A plans will be any less expensive than 529 plans.
Will 529A accounts help people with disabilities?
Federal benefits like Medicaid aren’t helpful to households that have more than $2,000 in savings. Medicaid could have been an essential tool for helping families afford medical expenses for disabled people, but the asset limitation does little to encourage financial security. A 529A plan would allow a disabled person to have much more sizable assets while still qualifying for Supplemental Security Income.
Some families have been able to establish a special needs trust to get around the $2,000 savings maximum for Medicaid, but not every family with a special-needs member can afford to establish a trust and these trusts don’t offer the tax benefits that 529A plans will. Some savvy savers have used 529 college savings plans inside a special needs trust to pay for educational expenses for a disabled beneficiary, but with the 529A plan, this can be done without the special needs trust.
One disadvantage of 529A accounts is that a household may take advantage of only the plan available in its home state, unlike 529 plans for college savings. Savers won’t be able to shop around. AARP also points out that any funds remaining in an account after a beneficiary passes away may be turned over to the state to help pay for Medicaid expenses. Also, if a beneficiary withdraws funds from a 529A plan and doesn’t qualify for special tax treatment, the withdrawals will be subject to a 10% penalty as well as the income tax, just like a 529 plan.
Excess contributions, deposits made into 529A plans beyond the gift tax exclusion, will be subject to a 6% penalty — so if you choose to save using this vehicle, be careful.
The added cost of typical expenses for an individual with autism over the course of his or her lifetime is $1.4 million according to the U.S. Department of Agriculture. The added cost increases to $2.3 million for a person with intellectual disabilities. Keeping that in mind, the advantages of a 529A plan represent a small drop in a bucket for people who are embarking on a life journey with an automatic financial disadvantage. When some families can take advantage of 529 plans for savings on education expenses, 529A plans could help create a complementary opportunity for families whose children may never attend college, but are certain to spend just as much, if not more, money on educational expenses for specialized services.
529A plans are protected in bankruptcy proceedings, as long as the contributions were made at least two years prior to filing for bankruptcy. A portion of contributions made more recently may be available to creditors’ claims. Due to the sometimes unmanageable cost of living with a mental or physical disability, the need to declare bankruptcy is more likely than it would be for other individuals, so this protection could be important or even life-saving.
These are the full qualified expenses, and they are quite comprehensive: Education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses. Any withdrawals made for other expenses will be subject to the penalty and tax.
Who qualifies to be a 529A plan beneficiary?
In order to qualify, a person must be or have been blind or disabled before his or her 26th birthday. If the person qualifies as blind or disabled under Title II of the Social Security Act or has a disability certificate on file with the IRS, he or she will qualify. Disabilities that qualify are those that include a mental or physical impairment that can lead to death or will last for at least 12 months, by the determination of a physician.
Some details about 529A plans still need to be worked out by the government, but as the plans exist on paper, they could provide some relief to people managing life with a disability. Once 529A plans are available to savers and consumers, readers will be able to find more information on Consumerism Commentary.
Since December, federal banks and credit unions have been allowed to offer savings accounts that include a raffle element, after some states have allowed accounts like these for some time. The goal of these lottery-like accounts is to encourage more people to save money, particularly those households with low and moderate incomes. This was the single provision of the American Savings Promotion Act, a bipartisan bill signed into law by the President of the United States.
How prize-linked savings accounts work.
When you open an account with a certain value, you receive an entry in the raffle. While account holders don’t necessarily earn interest, one lucky winner will receive enough interest to change one’s life. The more you save, the more chances you have at winning.
Here is an example of how this works, based on the “Save to Win” model, organized by the Michigan Credit Union League (MCUL) in 2009, in which some state credit unions are all ready participating. If you open up a 12-month certificate of deposit within a prize-linked savings account and deposit $25 into the account, you receive one ticket (like a raffle ticket). For every additional $25 you deposit into the account, you receive an additional ticket, up to ten chances per month. With the tickets linked to CDs, keep in mind that you may be penalized for withdrawing your money before each deposit matures at the end of the initial twelve months.
The prizes are generally awarded as small monthly prices or larger annual prizes. Even the small monthly prizes would be larger than the interest you could earn in the highest of high-yield savings accounts, but there’s no guarantee of receiving it. Some of the winners have been publicized like lottery winners or charities, with big checks indicating $10,000 in prize money.
For North Carolina credit unions in the Save to Win program, on the 14th of each month, there are 3 grand prize winners every year, receiving $10,000 each; three quarterly winners each year, with prizes from $500 to $1,500 depending on the quarter, and 312 winners each month across the state, winning prizes from $25 to $100. These are the Save to Win central drawings — each participating credit union may also supplement the program with their own drawings.
The state credit unions already offering these accounts may be successful in encouraging saving behavior among individuals who may not already be saving money — at least, not saving money in a bank. The accounts may attract people who are prone towards gambling or other risky behavior. Prize-linked savings accounts have been around in other parts of the world and have been shown to be successful in attracting depositors. The question remains whether encouraging good behavior through the potential of a prize has any lasting effect on savings behavior.
If people begin to associate saving money and other behaviors that ultimately benefit a family from a financial perspective with the chance to win a prize, they may only desire to take on these behaviors when they could win something — a prize more immediate than long-term financial stability. When parents pay their children a monetary prize for good grades, those children could be associating good school work with financial gain, which may not always work out well in the end.
Parents can control how they use rewards with their children, adapting the strategy to ensure they are working hard for the right reasons, but financial institutions look out for one thing: the bottom line. Banks and even nonprofit credit unions will continue to run programs like these as long as they’re profitable, with no regard for whether customers are overall in good financial shape.
Bloomberg explains some of the history of prize-linked savings accounts:
A bank in South Africa tried this in 2005. The First National Bank’s Million-a-Month Account promised savers a chance to win 113 prizes a month, including a grand prize of 1 million South African rand (about U.S.$150,000 at the time). Within 18 months, the bank had more prize-eligible accounts than regular ones. These new customers, many of them poor, saved an extra 1 percent of their incomes, a recent study found, and boosted their overall saving 38 percent…
A prize-linked savings account won’t help raise incomes, and it won’t lower the costs of health care or housing. But it may nudge Americans to pay just a little more attention to their savings, so that an unexpected expense doesn’t become a financial disaster. At the very least it could give some lucky savers the thrill of hitting the jackpot. (Bloomberg)
People are drawn to lotteries, usually for worse, but maybe also for better. If you look at the lottery as a “tax on stupid people” or a “tax on poor people,” this is a little different. In a typical lottery, you buy a ticket and never see that money again. It’s a terrible investment, yet people, not just the stupid and poor, continue to pour money into the lottery.
While offering the chance at a financial windfall might encourage more saving, is a $10,000 windfall enough to encourage behavior? I can remember my days (not too long ago) working in a corporate office environment. When the multi-state lottery prize money was high enough, well into nine digits, a group would organize and co-workers would pool money together to buy some lottery tickets. Throw a dollar in, have an infinitesimal chance of winning enough money to buy the moon. The odds are better when you deposit $25 into a bank, but the prize is not as significant. But at least you can get your money back.
Ultimately, the prize-linked savings program in South Africa was shut down because it was determined to be unlawful. But here in the United States, states and federal governments are making way for the potential for more accounts. It might take some time, but eventually, banks like Citi, Wells Fargo, and Chase could be jumping into the game.
In theory, banks would not need to charge fees for these accounts because they will be big money-makers for the institutions. As of September 30, 2014, J.P. Morgan Chase Bank was holding $1,377,661,000,000 in customer deposits, which would include interest-bearing and non-interest-bearing accounts. The bank spent $210,000,000 in interest on deposit accounts that quarter. That’s an average annual interest rate of about 0.00375%. Banks can profit on accounts that don’t pay interest — these are basically free loans from consumers to the institutions. They can use the deposits to earn a low interest rate. With interest-bearing accounts, banks pay the profits back to consumers, but they can keep more of the profit by paying a larger amount of interest to a much smaller number of depositors.
That’s how it would work out if each bank ran its own program. But like lotteries, an outside organization could handle the management of the prize accounts, which means that like multi-state lotteries, the funds are pooled and prizes are awarded across financial institutions. That’s where Save to Win comes into play.
How to open a prize-linked savings account.
It isn’t simple today.
To open account, first, you need to be a resident of one of the states that currently offer these prize-linked savings accounts: Michigan, Nebraska, North Carolina, or Washington. Then you must be a member of a credit union that offers a partnership with Save to Win, which seems to be the only lottery service catering to credit unions so far. For the most part, you won’t be able to open an account online. First, you’ll need to become a member of a participating credit union if you aren’t all ready and if you qualify. Some credit unions allow online applications. You will almost always need to visit or call the credit union to open a 12-month CD account linked to the Save to Win program.
Programs like these will continue to expand as national banks and credit unions begin taking advantage of the new law that allows these accounts in national financial institutions, both banks and credit unions. I expect that as the programs grow, they will be accompanied by significant advertising campaigns designed to get new customers in the door, appealing to the communities that banks expect would be most likely to respond to lottery-based promotions. In other words, this could be a way for banks to make profitable entries into low socio-economic status neighborhoods, something the financial industry has avoided.
To find a participating credit union in the four listed states, visit the Save to Win website. Frequently mentioned alongside Save to Win is SaveUp, a for-profit company that offers prizes to customers who exhibit positive financial behaviors, like paying off debt. That isn’t exactly the same as prize-linked savings accounts, but it follows the theory of treating customers like children (through financial rewards) to train better financial behavior among Americans.
Do you think prize-linked savings accounts are good ideas? Would you open an account for the chance to win one a lottery like this? Or is this just another way for the financial industry to take advantage of lower-class customers?
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These rates are subject to change at any time by the respective banks. Check the banks' websites to confirm the rates and terms before applying. *EverBank MMA 1.01% 1st-year APY up to $50K for first time account holders.
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