kids
You want to keep your child safe. It’s every parent’s first instinct. From bumps and bruises to Stranger Danger and developmental milestones, we think about all of the different ways that we can protect our children. Yet, many of us overlook an easy way to keep our children financially safe: a credit freeze for kids
What is a Credit Freeze?
A credit freeze basically prevents people from accessing your credit report. While this move may not provide foolproof identity protection, it will certainly slow down the efforts of identity thieves. How? Without access to your credit report, it becomes much more difficult to open new accounts in your name.
When your credit is frozen, you are still able to obtain credit reports. You can also temporarily lift the freeze if you need access to your credit report. Essentially, a credit freeze is a financial safeguard.
What are the Benefits of a Credit Freeze for Kids?
Most adults can appreciate the importance of protecting our identities. After the Equifax data breach, online security marched to the forefront of most of our minds. Even though many of us doubled down on protecting ourselves, freezing our children’s credit might have slipped our minds.
It’s understandable. Children don’t use their credit, so we don’t have to give it much thought as parents. However, that is precisely why it can be so beneficial to freeze your child’s credit.
Any kind of identity theft is problematic. Child identity theft is deeply troublesome because it can go undetected for years, even decades. As a result, children are the most vulnerable identity theft targets. In fact, a Javelin Strategy & Research Study found that over one million kids were the victims of identity fraud in 2017.
By freezing your child’s credit when they are young, you have one more tool to keep their identity safe. It can help you proactively protect them while avoiding the time, hassle, and cost that comes with restoring someone’s identity. Additionally, when it is time to have their credit unfrozen as they get their first job, plan to purchase their first car, or need to access their credit for some other reason, it’s an important teachable moment.
Steps to Freeze Credit for Kids
When you consider what easy targets children are for identity theft, a credit freeze is an easy choice. Unfortunately, the steps to freeze kids’ credit can be cumbersome. Here’s how you might go about freezing your child’s credit:
Know The Three Credit Bureau
In order to properly freeze your child’s credit, you need to contact each of the credit bureaus. While Equifax and Experian are both probably household names, TransUnion may not be. It is important to remember that you must work with all three credit bureaus.
Gather Up the Documentation
Freezing your child’s credit requires you to provide information about you and your child. To stay organized during this process, you will want to gather your personal documentation and your child’s documentation before you begin filling out any of the forms.
Documentation you may need includes:
- A copy of a government ID
- A copy of your Social Security card
- A piece of US mail with your name and address on it (utility bill, bank statement, insurance statement, etc.)
Documentation your child may need includes:
- A copy of his or her birth certificate
- Foster care certification – if applicable
- A court order for guardianship – if applicable
- A copy of his or her Social Security card
You will also be required to provide your addresses for the past two years.
Fill Out the Forms
After you have gathered up all of the documentation, you are ready to work with each of the credit bureaus. It is vital to remember that you need to contact each bureau. Some people mistakenly assume that since they only check their credit reports with one bureau, that one is enough in this case, too. It is not.
Experian has specific paperwork for you to complete. Once they receive the paperwork, they indicate that they will place the freeze on the credit report within three days. Equifax has its own separate paperwork for you to complete, and TransUnion requires you to send a written request along with the required documents. As you work through this process, you will want to make sure that you are paying close attention to the different requirements specified by each credit bureau.
My Experience Freezing My Son’s Credit
In case you didn’t notice, freezing your children’s credit can be a complicated process. Each bureau has a different set of requirements and parents are left hoping for the best. This process can take up your precious time and add unnecessary stress to your life.
Since I was the victim of failed identity theft, it was a no-brainer to freeze my son’s credit. However, I wanted something to streamline the process and get it done right. Coincidently, one of my old roommates started Credit Parent to make freezing your child’s credit a breeze!
Instead of having to manually mail all the required documents outlined above to multiple addresses. You gather the documents ONCE, scan them, pay the fee, and voila! Credit Parent takes care of the rest. Of course, all the information is stored securely and once confirmation from the 3 agencies is obtained, Credit Parent destroys your information.
We used Credit Parent to freeze Jack’s credit. Easy peasy.
We did run into a snafu with Equifax … along with about 20% of other parents trying to freeze their child’s credit. My first few calls to Equifax were unfruitful. Thankfully, Credit Parent enlisted the help of the NY Times to uncover Equifax’s practice. A few phone calls and about a week later, I received a letter from Equifax that my son’s credit report was successfully frozen.
Want to try Credit Parent? Use code MISSBONNIEMD for a discount!
Final Thoughts on Freezing Credit for Kids
Freezing your kids’ credit is not a decision to be taken lightly. After all, their credit is something that will impact them for the rest of their lives. Because your child’s credit makes identity theft much easier, a credit freeze is often a smart money move to make. The process can also be complicated. Either carefully following the specifications from each credit bureau or by using a tool like Credit Parent, freezing and unfreezing your child’s credit is one more way you can keep them safe.
Have you frozen your child’s credit?
Welcome to another installment of Interviews with Real Female Physicians. The goal of this series is to share their story so that you, the reader, may learn and be inspired from their experiences – good and bad. We all come from different backgrounds and have different situations. Some of you are married, some are not, some with kids, some with blended families. Let’s show other women that any of these can work financially! So let's introduce our next woman physician rockstar – The Frugal Physician!
Tell us about yourself:
Hello! Many thanks to Miss Bonnie for having me on here. Like many of you, I’m a multitasking, sometimes malwired machine that runs on caffeine. You can call me… The Frugal Physician (cue theme music). I’m mommy to two toddler boys, wife to my trophy husband (he loves it when I call him that), blogger at www.thefrugalphysician.com, and primary care physician trained in internal medicine. I dream of one day owning a jazz club and crooning at the piano in fancy dresses. They won’t be able to kick me out because I’ll own the place! And, I’m banning tomatoes. Anyway, until then, I’m focusing on being frugal and paying off debt. I live in Upstate New York (also known as “not the city”). I’m in Internal Medicine. So basically, I’m Dr. House…minus the cane and the opioid addiction. I started off in Hospital medicine and then switched to primary care. You’re going to think I’m nuts, but I LOVE primary care. I love being the first diagnostician my patients see and I love building relationships with my patients.Are you a resident or attending?
I’m the boss, baby. Not really, I’m employed. I’m an attending 3 years out of residency.Did you graduate with student loans? How much & what are the interest rates?
I graduated med school with $191k in student loans but by the end of residency they had grown to $237k, despite the $25k of payments I made in residency. I found myself on the wrong side of 6-8% compounding interest when $18k of interest compounded as I switched to standard repayment as an attending. So frustrating!How fast (or not) are you paying them off?
Oh yeah, I’m burning through them. First I refinanced with Sofi. This year, I’ve paid about $120k in 9 months towards the blasted student loans. Why? Because student loans weigh down my soul and crush my happiness. And, I did the math. If I put everything I’ve got towards the loans and burn through them, I can still catch up on investing by the end of 10 years. See my post “Counting Macaroni’s.” My goal is to buy my freedom! Once the student loans are gone and I have a good stash of savings, I really feel like I can be a better doctor. I can advocate for my patients and for what I think is right without fear of not being able to feed and clothe my kids if I lose my job. My dream is to one day start a non-profit, cash only clinic with a graded pricing scale based on income.Financial aspects of kids
When did you have them?
At the very end of residency and in second year as attending. Wouldn’t recommend that. In hindsight, having them both in residency would have been better. Being a nursing, sleep deprived new attending blows. We have a lot more protections in residency as far as benefits and work conditions go.Are you planning to fund their college expenses?
Yes, once I’ve paid for my schooling expenses. Right now, they have regular brokerage accounts for the money they get for birthdays, etc. I’ll roll that into 529’s once they meet the minimum required for the state.What are your child care expenses?
$2200 a month for daycare … barf. Still going.Are your kids in private or public school? What is the cost including after care if needed.
We’re going public. Free school! New York taxes sucks but they pay for nice schools.
Financial aspects of marriage
Are you married?
Married to a studmuffin.Did you get a pre-nuptial or post-nuptial agreement?
No, wasn’t smart enough to think of that. I was a broke resident not Jay-Z, so my head just wasn’t there, you know?Do you and your husband agree on finances?
Mr. Frugal Physician was always on board with the idea of achieving financial independence. Agreeing on deflating our lifestyle and increasing frugality took some time to achieve. Key to our success are monthly budget dates, where we can realign our goals and our spending habits.Does your spouse stay at home?
No. He did that for two years and that didn’t work for us. He is a lot happier working. Staying home is a lot of work!Are you the breadwinner?
Used to be for the two years Mr. Frugal Physician stayed at home, took care of our baby, and worked on his masters. It was tough.Financial Mistakes
What financial mistakes have you made?
Oh boy where do I start. Wish I had started a Roth IRA in college when I was working 3 jobs. Right out of residency, I inflated my lifestyle to my attending salary, which was a big mistake. We reversed course and deflated the lifestyle within two years. More about this on my blog.Have you experienced a financial catastrophe?
Yes, our house flooded with Hurricane Irma. Flood insurance doesn’t cover everything you might think. Biggest lessons: read the insurance policy and talk to insurance provider before making any changes to areas of the house that might flood. Keep a written record of all communications with the insurance company.
General Finances
What’s your FI (financial independence) number?
$2.5-3 mil. Calculated by using the 4% rule: Yearly expense x 25. I don’t plan on retiring when I reach FI, though. Being idle is not my forte. I just want the option and the freedom.Who handles the finances in your relationship? Are you DIY or do you have a financial advisor?
I do. We met with a couple of financial advisors, but I really wanted to learn how to do it. I’ve found DIY to be much better. I get much better returns than my financial advisor just investing in low cost index funds.What is your net worth?
About $165k including home equity. Up from the negative $100k or so just a couple of years ago.How are you saving for FI/retirement?
IRA’s, 401k’s, HSA. But currently, most of our extra money is going towards paying down student loans as fast as possible. Asset allocation is 80:20 stocks to bonds. Plan to get into real estate more in the future.Biggest financial failure/regret:
Just wish I had started saving earlier.One thing you wish you knew:
That I didn’t have to finance my lifestyle in medical school! Wish I had been more frugal while in school and had taken out less debt.Do you have (long term) disability insurance? Life insurance? Umbrella?
Yes to allHave you had to use (long term) disability insurance?
Thankfully, no.Do you give to charity? If so, where and why?
Yes! Giving brings me a lot of joy. Since we don’t have extra money right now, we donate our time. My husband and I volunteer to cook meals for the Ronald McDonald House. We did a lot of fundraising this year for the Leukemia and Lymphoma Society.Any parting words of wisdom?
Just spend less than you earn. Invest the rest. Read J. L. Collins’ “Simple Path To Wealth.” Plug into the financial independence community and you will learn a lot!Tell readers a fun/random fact about you:
I used to have an elephant mow my lawn! I’m a first generation immigrant. In India, we had an elephant that lived with her caretaker in our neighborhood. Her name was Jamuna. She would come around and give us rides. My parents would let the grass grow long enough for her to eat and then let her have at it!And finally, where can people connect with you?
Come subscribe to The Frugal Physician at www.thefrugalphysician.com, follow me on Twitter @FrugalPhysician!And … that's a wrap! If you're interested in doing this please send me an email – I'd love to hear from you!
I love how The Frugal Physician is crushing her debt at lightning speed. Go check her out! ]]>
Life Hacks post. She blogs at PracticeBalance.com about finding balance as a physician mom. She and her husband are financially independent. You can read her interview here. The other day, my 2 year old daughter asked, “Who gave us this house?” We both paused and looked at each other. “Um… No one. We bought it with our own money that we made ourselves.” This is the first time we had talked to her about anything related to money, and I’m sure it won’t be the last. As she grows up, she’ll no doubt deal with the marketing of products directly to her, comparisons to friends, cases of the “I wanna’s”… then ultimately management of her own earnings and debts.
Always creating and learning
Unlike some families where money is a taboo subject, we hope to have many money conversations with our daughter as she matures, because financial responsibility is very important in our family. We’ve worked hard over our adult years to become financially independent and free from any debt or mortgage, which has allowed us to both work part time. When I was a young girl, I never felt that my family was in a state of lack. But I also never grasped the mathematics side of money, the finiteness of it. That all changed when I became a mother. Although my husband had been equating money with life energy for many years at that point, I didn’t see it until I had this being in front of me that I wanted to spend all my time with. I had spent years, tears, money, and life energy to have her (due to infertility), yet she was priceless. Any time at work was suddenly time away from her.
One of the lessons I really want to teach my daughter is the idea of value. Value is relative and individual, as one person’s prized possession can be another’s throw-away item. Likewise, the way we prefer to spend our time (which ultimately equates to money) can vary drastically from person to person. I cringe when I hear people use the words, “We can’t afford it.” Kind of like saying, “I can’t eat that cupcake” or “I don’t have time to do ______”, it’s rarely true in a literal sense. You can if you want to, but you choose not to, for whatever reason. It’s a mistake made often by people in all financial situations, both wealthy and poor.
What harm is done in saying “we can’t”? It sets a tone of scarcity vs. abundance. The scarcity mindset keeps us from feeling we have choices or control over our financial situation. It places issues in a negative light, such that we make decisions out of fear and compare ourselves to others. On the flip side, being valueist means that we see the potential abundance in things. We make decisions from a place of optimism, because again, anyone can afford anything they inherently value.
Taking time to find the rainbows
Affording anything, however, must come with financial sacrifice in other areas of our lives. We’ve all seen examples of people driving around in very fancy cars despite meager earnings. I’ve been to third world countries where a family shack contains a large screen TV. Everything we buy is a choice and is conversely a choice in the opposite realm (against saving or spending on something else). How much is an extra hour a day with your child worth to you? Is it worth not having a cleaning lady, taking a 30% pay cut, moving to a smaller house? In addition, there are degrees of choice here; you can choose to NOT buy the nicest item you can afford. The common belief that everyone buys the nicest things “they can afford” leads to a false evaluation of success based on material goods.
Of all the things I value, time with my family sits at the top of the list. I hope someday my daughter will understand this concept when she wants me to buy her something that I choose not to buy. The best thing we can do is to live our lives in alignment with our respective values and provide an example for our children.
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if any, for your kid(s)'s education & life is a personal decision. There is no simple answer. I don't recommend doing any of these if your finances are not in order. Remember, there is no such thing as a loan for retirement. My 1 year old already has 3 accounts and about to open a 4th. Why? To take full advantage of time and compound interest of course. Here they are in order of when we opened them.
1. 529 College Fund
529s are the king of college savings accounts. You contribute after-tax money in, it grows tax free, and you don't pay taxes on withdrawal. You may even get a state tax deduction for your contribution. You can also open one before your child is born! So if you know you're going to have children and get a decent state tax break like I did when I was living in NYC, it's not bad a idea to get one going. Where should you open one? Start with your own state's plan. If you get a state tax break you'll want to find out if you're limited to using your state's plan to qualify for a deduction or not. A few states, including my now home state of PA, allow you to use any state's plan. So, I've kept mine with NY which currently offers the lowest fee Vanguard funds. We currently invest it all in the Aggressive Growth Portfolio which consists of 70% Total Stock Market Index Fund and 30% Total International Stock Index Fund. If your state offers no tax deduction then I recommend NY, Utah, or Nevada's plan. Pick Nevada if you already invest in Vanguard and want to keep things clean. Don't overthink it, just pick one. And – make sure you select the direct plan and not the plan via a financial advisor which are loaded with extra fees. There is a penalty if you withdraw money for non-educational purposes. Because of this I recommend saving something like 70% in a 529 and the rest in either a UGMA/UTMA or your regular brokerage (aka taxable account). There is a special rule allowing parents to frontload 529s above the gift tax limits. You may frontload 5 years worth (5 x $15,000 or $30,000 = $75,000 or $150,000). For those that can swing this, this is a great way to get that money growing for college.2. UGMA (Uniform Gifts to Minors Act)
UGMA & UTMA are basically savings and/or investing accounts for your children. You own the account as a custodian until junior reaches the age of majority. This age is state dependent but usually ranges from ages 18-21. Once they reach this age the account belongs to them and you lose control. Since this is an asset your child owns it will be counted for college financial aid calculations. The money can be used for anything. On the flip side, interest, dividends & capital gains are taxed. The taxation recently changed with the new 2018 Tax Law and will be taxed like trusts (15% & 20% tax above $2,600 & $12,700 respectively). Previously, the first $2,100 of unearned income (interest, dividends & capital gains ) was not taxed.3. Coverdell ESA
Huh? That's the usual response I hear when I recommend this account for children. I already discussed how great ESAs and how you can fund one despite being over the income limit (kind of like the backdoor Roth IRA). You can only contribute $2,000 a year but over time (and compound interest) you can have a sizeable chunk of cash to use for either private school and college. Although there is a new ruling allowing up to $10,000 per year withdrawals from a 529 account for K-12, not all states have adopted this. I also don't recommend doing this unless 1) you get a nice state income tax deduction (like NY) and/or 2) you frontload your 529 at or near birth. Otherwise the money just won't have much time to grow if you keep withdrawing money from it. Unlike the 529 plan, you cannot open one before your child is born.4. Roth IRA
[caption id="attachment_2545" align="alignleft" width="351"]
Jack's Korean Dol outfit[/caption]
We haven’t opened a Roth IRA yet but will before the end of this year. Children can open a Roth IRA if they have earned income. Chores around the house do not count. Babysitting and working for your business do. In Eggy’s case, he’s a print model for this website.
What, you think he let me use this photo for free? Nope.
A Roth IRA for your children via a family business is a win-win situation. You pay your child for work, you get a business deduction, he/she gets earned income and can open a Roth IRA. Once inside the Roth IRA, the money is never taxed again! Better yet – until he makes a sizeable income through the family business he won't pay federal and likely no state income taxes as well!
Now, the key is to pay your child a reasonable wage for the work. It won't pass the snuff test if I paid Eggy $5,500 for a few photos on this website.
A quick reminder to stay under the gift tax limits for total contributions to your children's 529, ESA, and UGMA/UTMA accounts. Currently, the gift tax limits are $15,000 or $30,000 for married couples. So, in other words, don't contribute more than $30,000 across the 3 accounts in a year. An exception to this is the 5 year frontloading exception for 529s.
We opened and kept his 529 in NY. His UGMA and ESA accounts are at TD Ameritrade. We plan to open his Roth IRA at TD Ameritade since Vanguard does not allow minor Roth IRAs.
What do you think? Comment below!
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This is Part 2 of Making A Million Dollar 18-year Bet, a guest post by Platinum Sponsor Johanna Fox of Fox & Co. Wealth Managementt, a fee-only financial planning firm. Start as early as you can As Bonnie says, compound interest is the 8th wonder of the world – you want to make it work in your favor. If you can afford to begin at birth, choose the most aggressive portfolio possible and contribute at least enough to get your state’s annual income tax break. Learn the rules in your state, too: some states allow tax breaks for contributions to other states’ plans and the cutoff for contributions vary: 12/31 in some states and 4/15 in others. Even if you can only afford to fund a minimal amount at birth, start with something as long as you are not compromising your retirement goals. In the Varkeys’ case, assuming 7.5% average return, choices include (not considering the time value of money):
- Frontloading the 529 with $108,859 (because they are allowed to frontload $75k/person, they can split the gift and fully fund college). OOP savings = $384,801
- Contribute $27,500/yr to the baby’s 529 for 5 years. OOP savings = $351,660
- Make monthly contributions of $818/mo. for 20 years. OOP savings = $297,380
Use ESAs for lower grades
Our couple hopes to send their children to private high school. In this case, we recommend they add Coverdell Education Savings Accounts (ESAs) in addition to 529s. ESAs are often overlooked because:- Contributions are limited to $2k/yr per child and
- Those with income over $190k are phased out from contributing (but you can get around this).
Underfund your 529s and ESAs
This may sound contrary to the key principle “start as early as you can”, but please bear with me and it will make sense. My goal is to use up all of the money in your tax-blessed accounts. Otherwise, in general, you’ll pay a 10% penalty on funds you withdraw that are not used for approved education costs. There are exceptions to the 10% penalty, such as if a child gets a scholarship, but not for just having money left over. Of course, you can pass account leftovers down the line to younger siblings, and we plan to do that, but I’m trying to keep it simple – say, you don’t need as much because your children decide to start out at a community college or want to go to a state school with a best friend, or, even worse, follow a boyfriend or girlfriend there. How can you possibly plan for that? To mitigate that risk, we recommend that about 75% of projected expense goes into ESA/529s, with the remaining 25% going into a taxable investment portfolio. When following this recommendation, start the taxable account only after you have funded the 75% in 529/ESAs, which will maximize your tax-free funding. If you end up needing the taxable account, you’ll be able to take advantage of lower long-term capital gains and dividend rates. If you don’t need the taxable account for education, voila! Can you say “beach home?” So what about med/grad school – what should the Varkeys do? At this level of income with 3 children, they will probably need to raise their family in a LCOL area of the country, plan to work extra shifts for a few years (if that is an option), determine to be extremely frugal, or save to fund a less expensive college experience – after all, they are saving for 6 educations. Possibly forego the private high school. Or they could save only enough for 50% of med school (1.5 educations instead of 3.) Remember, planning is about prioritizing how to allocate limited resources to achieve your goals. We’re back to priorities – what are your priorities about lifestyle and education? It’s very important to get those figured out in the beginning rather than simply saving what’s left over in your bank account each month. For example, one of our clients in this very situation has opted to set aside enough for med school for one child using the 75%/25% rule. If one or both of the other two siblings also decide to be physicians, then we are planning to have enough saved in a taxable account to also send them. This couple lives fairly frugally and in a LCOL area.Finally, invest aggressively if you can self-fund
Here’s the way I look at it – if you can cash flow the early years, particularly private K – 12, then you should keep your savings invested in a well-diversified equity portfolio up until the time you need it. If the market is down, we would plan to pay cash for private high school in this situation. If the market is climbing, we’ll liquidate enough of the 529/ESAs to pay the tuition annually. The 75/25 rule comes in handy again to prevent you from over-saving. And, of course, you can allocate your own savings any way you want: 60/40, 80/20, and so forth. By thinking through your choices, resources, and priorities, and then following your plan, you will have a much clearer path to saving for huge expenses that seem too far away to even think about when your children are young. I hope this information has been helpful!]]>… (or Smart ways to fund your children’s education) This is a guest post by Platinum Sponsor Johanna Fox of Fox & Co. Wealth Managementt, a fee-only financial planning firm. Until recently, she was also our financial planner. Saving for college is on the minds of most of our clients since around 75% either have young children, are pregnant, or both. The amount you need to save for education depends upon the choice of college, how many children you have, how much your funds grow, and the percentage of college, grad school and/or med school you want to fund. For a family with even two young children, you can easily looking at a need of $1M – $2M by the time they are ready to start college, especially if you plan to fund post-grad. Of course, that’s not even considering private school for K-12. Planning ahead and doing it right will both save taxes and increase your long-term net worth. But planning so far into the future for little creatures with minds of their own is a daunting and expensive challenge. To explain how to build an education savings plan for your own family, let’s review a case study. I’ve built a composite family, the Varkeys, using details from several clients’ plans:
- Dual physician family earning $680k/yr with children ages 2 and 6 plus another on the way
- Want to save enough for 4 years at Georgetown University, their dad’s alma mater, and maybe medical school.
- Hope to send children to private high school @$15k/yr/child.
- Student loans of $150k, refinanced @3.875%
- 2 mortgages: $850k on a $1.3M house and $450k on a rental duplex
- One spouse has access to a 401k and the other has access to a 403b/457b combo, and they both do annual backdoor Roth IRAs.
- And by the way: they hate debt
Prioritize
One of the biggest challenges of planning is prioritizing how to allocate limited resources to achieve your goals. The first rule in saving for education is not to sacrifice your own future: there are no scholarships for retirement and you will not be doing your children a favor by providing for nice educations at the expense of having to rely on them in retirement. However, you may be able to forego some retirement savings in the near term in favor of early education savings, and then get back on schedule. So, if your projections show that you will be able to skip a few years of 457b and backdoor Roth IRA contributions and have a few million dollars left at death, and that’s the only way you can fund your education accounts, then we might consider frontloading education to launch early tax-free growth and then return to maximizing all retirement space possible. Save for school or pay off debt? Since the debt feels so burdensome, I wouldn’t have a problem attacking the student loans heavily for 3 years but not the mortgage or rental interest. The reason is that student loan interest is not deductible, and lingering student loans are oppressive to many graduates because it represents nothing tangible. The interest on the mortgage is deductible as an itemized deduction and the interest on the rental will be deductible at some point – either when their rental begins to show a profit or when they sell it. And having tangible assets that are appreciating in value mitigates the emotional aspect of paying for “nothing”. Note: If you have access to an HSA, I would not forego contributing – ever (but that’s another article.)]]>
before. But what about the new tax laws? Use this guide to learn everything you need to know to get started with a backdoor Coverdell ESA.
First things first. With the new tax law allowing one to withdraw $10,000 annually towards private school, you may think the ESA is no longer needed. Not so fast.
The ESA still makes sense to contribute to even if you're not sure if your child will attend private school. It becomes a 529 if he doesn't. Ideally, you would open both a Coverdell ESA and a 529 as soon as your child is born (or better yet, open the 529 before they are born).
If you plan to send your child to private school, then ideally you would frontload the 529 x 5 years or $150,000 ($30,000 x 5 years) to give the magic of compound interest a head start.
Still, that only gives you about 5 years if you send your child to private kindergarten. It's best if you give it more time to grow if you plan to use part of the 529 for private school.
Meanwhile the ESA account is growing (yes, it is limited to only $2,000 a year), but by the time Junior is in middle school or high school, the ESA account will have around $40,000 in it.
Using the 529 for private school is even more attractive when you have a state income tax deduction and you continue to contribute to it as you withdraw annually for private school.
Most private schools in the U.S. are well over $10,000 a year, so the ESA functions as a backup reserve of tax advantaged funds to use.
Backdoor Coverdell ESA Steps
Now, how do you actually open and fund a backdoor Coverdell ESA? Most physicians are well over the income limit. There are 3 basic steps:
Step 1: Open a UTMA account and fund it.
My suggested custodians for this account are etrade, TD Ameritrade, and Charles Schwab. None of these custodians charge a fee and many of you likely have an account already at one of them. You fund the UTMA with gifted money, so this goes towards the annual gift limit ($15,000 in 2018). Note, the gift does not need to come from you.
Step 2: Open a Coverdell ESA account.
Again, I recommend the same three custodians above. And I recommend you use the same custodian for both accounts for ease.
Step 3: Transfer money from the UTMA into the Coverdell ESA.
This is the “backdoor” way to fund the ESA since the UTMA is owned by your child.
Final Thoughts on Backdoor Coverdell ESAs
We chose TD Ameritrade for our UTMA and Coverdell ESA. Right now, we don't have a plan as to how much we will fund the UTMA in general and are mainly using it to contribute to the ESA.
We also don't know if we will choose public or private school yet. Eggy was born in late 2017, and we have funded both 2017 and 2018. You have until tax day to fund the ESA.
To give your savings a head start and to let compounding do some of the heavy lifting, get started with the first step of a backdoor Coverdell ESA today.
What do you think? Do you plan to open an ESA for your child?
We were at my parents' in NJ when the bleeding started.
My first call to the on-call OB was met with reassurance. “One episode of bright red bleeding + clots is ok.”
Except it quickly became 4-5 episodes in < 1 hour.
The next call – “Go to the nearest ER.” Except that I wanted to be at my hospital with my doctors. I felt ok and the bleeding was intermittent so we took a chance and decided to head to Long Island. Google maps said it would take 1 hour.
So off we went. We left Eggy home with grandma. We let my OB's office know we were on the way.
I double diapered myself and brought chucks for the ride. I brought my donut pillow to sit on (3rd degree tear …).
The last 20 minutes or so were scary. I started bleeding profusely and constantly. I bled through the two diapers, onto the chucks, onto the donut pillow, onto the seat and seat belt. I tell M he may get rich sooner than planned …
But I feel fine. I check my pulse, seemed “normal”.
We roll up to the ED entrance. The security guard immediately puts me in the wheelchair as blood is spilling out of the passenger seat. M goes to park. I get wheeled into triage and the nurse starts to do intake and looks at the blood pooling below me, “I'll register you later…” then wheels me into the ED directly into a trauma bay – “Crit B”.
M parked and when he arrived at the ED entrance looking for me the guard says “Follow the trail of blood.”
The usual happens. Vitals are taken. I'm slightly tachy. My BP is high as my body is compensating for the blood loss. 2 x 18 gauge IVs are placed quickly. Blood is sent. My on-call OB arrives. An ultrasound of my uterus is done. 1 unit blood was hung pretty quickly as I am whisked to the OR for emergent D&C for presumed retained parts.
I wake up in recovery. I'm getting a second unit. Anesthesia did a great job as I remember nothing and have no pain. The NP examining me notices my engorged breasts and gets me a breast pump. I'm not sure how I managed to pump but I did (with assistance from M). I end up in recovery for several hours since a 3rd unit of blood is given. I finally get wheeled into a room at ~ 4am.
Two weeks prior to this, Eggy was born.
This sweet moment only lasted a few minutes as I started hemorrhaging after the placenta was delivered (yes I've had not one, but two hemorrhages).
After a few minutes of skin to skin with Eggy, I suddenly feel very cold and shiver uncontrollably. Things are a bit of a blur but I remember the room being suddenly full of doctors and nurses – the “OB crash team” so to speak.
Another IV is placed. I see M in the corner holding Eggy. I'm getting shots to stop the bleeding. M later tells me blood was pouring out and was all over the floor. I turned white including my lips. I received two blood transfusions.
After 5 blood transfusion in two weeks, it seems like more blood is foreign than mine.
A 10lb sand bag is placed over my uterus to contract it.
These recent experiences taught me that life is precious. I'm grateful I didn't have a home birth (was never a “dream” of mine). I'm grateful for the doctors (shout out to my OB – good friend from medical school) and nurses that took care of me.]]>
You likely already know that 529 plans allow you to save and invest money tax-free for college. Some states also give you a tax break incentive to contribute. But you may not be familiar with the Coverdell ESA.
What is an ESA?
The ESA is similar to the 529 plan in that you contribute after-tax money. It also grows tax free and is tax free on withdrawal if used for qualified educational expenses. Unlike the 529 account, you can purchase a computer with an ESA.
There are a few other key differences:
- There is no federal or state tax deduction for contributing to one
- The annual contribution limit is $2,000
- The ESA can be used for private school (pre-college) and college and graduate school
- There is a income limit to contribute to one: $110,000 single or $220,000 if filing a joint return*
The main reason to open is if you plan to send your kid(s) to private school. $2,000 a year does not sound like much. but if you start early and let compound interest do its magic,you might be surprised:
By the time your kiddo enters high school, you'll have a decent amount saved (depending on where you are – this may pay for 1 year of private high school in NYC …).
What about the income limit? There is a backdoor way of course. You won't be able to open one up yourself but your kiddo can!
How to do a Backdoor ESA to Save for Private School
You gift the money to your child usually through a UTMA account. The $2,000 counts towards the annual gift tax limits, so keep that in mind when you're also funding a 529.
In any given year, the beneficiary can only receive $2,000 a year towards an ESA. So unfortunately, Grandma can't open one for your kiddo and contribute an additional $2,000 annually.
Also, the money must be used by the time the beneficiary turns age 30. A tip is that the money can be rolled over to another beneficiary within the same family. So if you wanted more money for your kiddo over the $2,000 annual limit, you could fund another family member's ESA (they must younger than 30) and then roll it over in the future.
Where should you open a Coverdell ESA? As with any investment account, you want to minimize account and trade fees and have flexibility with how to invest the money.
At this time, I recommend etrade and TDA for no account fees and low to no cost trade fees to help you start to save for private school.
Final Thoughts on How to Save for Private School and Beyond
Using a combination of a 529 savings plan and a Coverdell ESA can help make the costs of private school, college, and beyond a bit more manageable. While it might not seem like enough, the earlier you start, the better. In fact, you can even open a 529 before your child is born. By taking the first step outlined here on the Backdoor Coverdell ESA, you can let compounding help you save for private school starting today!
Do you have an ESA? Comment below!]]>
In Part 1, I discussed things you should consider prior to becoming pregnant. Here is the rest.
You're Pregnant!
Congratulations! Don't panic. The good news is you have about 9 months to plan!
1. Get insurances NOW if you haven’t already for the above reasons. You may get a pregnancy exclusion but just get it and you can re-apply and get more later. Find out your OOP expenses for your health insurance if you have not already as well.
2. You'll need a basic will in place to name the guardian of your child should you pass and notify the guardians you choose. This often becomes a non-urgent to-do item after the baby is born unfortunately.
3. Retirement plans at work: If you’re taking unpaid leave or any leave, you’ll want to frontload your 403(b)/401(k)/457(b) so they are maxed out before you deliver. I recommend you frontload these accounts at least 2 months prior to your expected delivery date in case of a preterm delivery. Although this won't be a deal breaker, you'll also want to find out if and how frontloading affects employer matching if you get any.
4. If you haven't already, find out what steps need to be taken to take your maternity leave:
- First, you'll need to decide how many weeks you want to take off. This is a highly personal decision. I've yet to meet a woman who said they took too much time off.
- Depending on your employer, you may get completely unpaid leave or a combination of paid and unpaid leave. You may be responsible for paying your benefits during unpaid leave.
- If you can use your vacation days towards paid leave, hoard them!
- Finally, tell your boss or administrator so everyone at work can start planning for your leave and coverage gaps.
5. Think about childcare options. It comes down to daycare vs. nanny vs. stay at home partner.
- Daycare and nanny costs vary significantly based on location.
- In some cities (ahem, NYC), there can be up to a 1 year waiting list for young infants. I'm not sure how this works since no one can actually predict when they can become pregnant.
- I recommend you pay a nanny on the books. Not only is it illegal not to, but you open yourself up to a ton of liability by not doing so.
6. Think about whose medical insurance the newborn will go under – you or your partner. It may just end being the one where the pediatrician is in-network and convenient for you.
7. Start drawing up a list of things you'll need to buy for the baby:
- Distinguish between needs vs. wants. I recommend making 3 lists: need, really want, want. Keep in mind the need list is shorter than you think! There are fortunately or unfortunately tons of items to fit any budget. I recommend using the book Baby Bargains and the website Lucie's List to hone in on the items.
- Whether you end up having a baby shower or not, I would still create a registry. Close friends and family will ask and they will want to buy you a gift. You might as well receive items that you want! I used Baby List for my registry.
- Remember, you don't need a ton of stuff when the baby actually arrives. I recommend a wait and see approach to avoid a shopping craze.
- Don't forget that you'll need some stuff too! Maternity clothing, postpartum supplies, nursing clothing and nursing equipment. At this time, breast pumps are required to be covered by your insurance.
8. Start saving for stuff (above) and for unpaid leave if applicable. This is a good time to curb your regular spending to get ready for the baby and all the expenses that come with it. Remember, you'll need to save for monthly expenses, not total income replacement. I hope you are living below if not well below your means so it should not be as much as it sounds.
9. This is not a financial tip (well sort of), but I highly recommend that you and your partner take a babymoon. A great time to do this is in the beginning of your second trimester. The nausea and unrelenting fatigue of the first trimester are over and you are not inhibited by your growing belly yet. Your lives will never be the same (for the better!). Do not forget the primary relationship (your partner). I also recommend you plan and budget for weekly date nights sans baby.
10. Outsourcing. While you're probably a type A, can do-it-all mom-to-be, the reality is it gets harder to do this as your pregnancy progresses. Don't be afraid to start outsourcing things like cleaning, laundry, and even cooking so you can get much needed rest prior to baby. You may also need to hire help with the baby if you don't have good support or family nearby. Remember, outsourcing will make you happier.
11. Find local mommy groups. Not only are they a source for used, unused and sometimes free baby items, but they are a source of support during this exciting and sometimes anxiety-provoking time. Consider joining Physician Moms Group (PMG) on Facebook. There are also local PMG groups as well. Remember, at the end of day, you will figure out how make it work!
Thousands of physician moms already have! What I have done/am doing:
- My second life insurance policy went into effect just weeks before I became pregnant. I may have gestational diabetes (as of writing this blog post I failed the 1 hour glucose challenge). Boy am I glad I had my policies in place!
- My insurance paid for 6 pairs of compression stockings – highly recommend you get some! 20-30 mmHG is recommended. I got Sigvaris Eversheer calf-high socks.
- M and I took a babymoon to Paris when I was 20 weeks pregnant. We used credit card points for flights and hotel so we only had to pay for meals, local transport and shopping.
- I am the breadwinning partner. I am taking
1216 weeks of leave. I am fortunate that at least 8 weeks will be paid. I‘ll have up to 4 unpaid weeks of leave. We live below our means so the unpaid portion is totally manageable. I am also thinking about taking an additional 4 weeks to work part-time before going back full time. Again, living below our means gives us this option. - I am on a waiting list for daycare (yes they told me 1 year…). The daycare is
$2600a month. We are still considering a nanny while the baby is very young as well. - I have started outsourcing a few things and do not regret it!
Recommended books:
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