Financial planning for new parents

One of the most disruptive events in the course of many physicians’ careers is also one of the best things—if not the best thing—that has ever happened to them. In a word, parenthood.This major life event also happens to be an expensive venture for any parent in any profession. For doctors—particularly those who own and run the business behind their medical practice—having a child often means significantly reduced income in the baby’s first year of life, and ongoing additional expenses in the years to come.“So if you’re used to making $30,000 a month, when you have a child you could easily lose $100,000 in income just in the first few months,” said Alan Acton, an Ottawa-based portfolio manager and wealth advisor at National Bank who specializes in advising physicians. “And you can’t make up for that lost income, so you better have a plan.”Parental leave benefitsMany people don’t know how much they’re spending and doctors are no exception, said Acton. For physicians planning to have kids, it’s especially important to get a handle on monthly expenses and set down a budget. It’s also a good idea to find out, well in advance, how much income can be expected to come in from provincial employment insurance and medical association parental leave benefits and for how long, said Acton. These benefits vary across the country. Medical association benefits in Alberta, for example, max out at $1,074 a week for 17 weeks while in Nova Scotia and New Brunswick, physicians who are new parents can get up to $2,000 a week for 26 weeks.Stash that cashCash is king when it comes to being financially prepared to welcome a new family member, said Acton. He suggests putting money away as soon as you decide to become a new parent—or as soon as you know that baby is on the way—and parking these funds either in a high-interest savings account or, if the rate and time horizon make sense, in a guaranteed investment certificate.“It’s never too early to start planning and putting money aside,” said Acton. “This will also help you plan your budget, because you know how much you’ll have in the bank during those months when the only monies coming in are from maternity benefits and maybe from your corporation.”Strategizing withdrawalsGurtej Varn, a certified financial planner and founder of Surrey, B.C.-based White Coat Financial, which focuses on healthcare professionals, underlined the importance of ensuring withdrawals are done in the most tax-efficient way possible. How this is accomplished would depend on each doctor’s situation and would take into account factors such as whether or not there’s a medical professional corporation.As an example, Varn cited the case of a physician client who is planning to have children two years from now. This particular doctor does not have an incorporated practice, has about $80,000 sitting as cash in a tax-free savings account (TFSA) and plenty of unused RRSP contribution room.“She earned a very sizable income so far in 2023, so we figured, why not roll some of that money in her TFSA over to her RRSP so she can pretty much wipe out her tax bill for 2023?” explained Varn. “Then she could pull money out of her RRSP to smooth out her income while she’s on maternity leave. By taking this approach, she’ll be getting that tax break today and while she will have to pay some tax when she makes RRSP withdrawals in the future, she’s going to be pulling that money out at a much lower tax bracket.”Build corporate investmentsOne strategy Varn employs among some incorporated physicians planning for parenthood focuses on investing in Canadian dividend stocks, which trigger a refundable tax on paid-out dividends. These payouts are then reinvested back into the fund to grow the capital, from which the medical professional corporation can pay the physician—and perhaps also the physician’s spouse if that person is a shareholder—dividends during parental leave. “So instead of drawing a salary, you pay yourself a dividend from the corporation, which will result in a tax credit,” said Varn. “The caveat here is that this works only when there’s a sizable portfolio inside the corporation and there’s enough dividends to pay yourself from your investments.”Hiring a nanny?Hiring a full- or part-time nanny can in many cases end up costing less than daycare—especially for more than one child—while providing the advantages of having a dedicated care provider right in your home. Former Ontario Medical Association president Dr. Rose Zacharias, an emergency medicine physician and mother of four, said research is key to ensuring it makes financial sense to hire a nanny.“The first part of this is figuring out what wage to pay a nanny,” she said. “In my case, I did everything from an Internet search, including looking at a nanny agency website, to asking all the moms I knew. I wanted to make sure I was compensating my nanny fairly.”Physicians considering sponsorship of a nanny from another country should tally up all the costs associated with this process. Families with an annual income of more than $150,000, need to pay an upfront $1,000 processing fee—payable to the Receiver General for Canada—to run a labour market impact assessment, intended to demonstrate that hiring a foreign worker won’t hurt the Canadian labour market.Other potential costs include third-party recruitment fees, advertising fees to attract applicants, legal fees, work permit fees and airfare to Canada from the caregiver’s country of origin. There’s also the cost of private health insurance for emergency medical care, which employers are legally required to provide for nannies who aren’t covered by provincial or territorial health.Dr. Zacharias said physicians who want to hire a nanny should also be aware of their legal obligations as employers: to provide vacation pay, make the deductions legally required from the nanny’s wage—such as employment insurance premiums—and to issue legal documentation, including pay stubs and records of employment.Plan beyond expensesActon said the impending arrival of a child should also nudge parents to create or update their financial and estate plan—which should include a will—to take into account this expected new addition to the family.He recommends setting up a registered education savings plan as soon as possible—you’ll need to get a social insurance number for your new baby—to take full advantage of the Canada Education Savings Grant, which tops out at $7,200, and to give the account plenty of time to grow.Incorporated doctors might also want to look at setting up a health spending account, which could allow them to essentially write off their kids’ health and dental expenses, said Acton. While the idea is sometimes greeted with raised eyebrows, buying life insurance for a child is worth considering, he said. In addition to cheap premiums, buying whole or universal life insurance for a child could also be a smart way to transfer wealth tax-free to your heirs, said Acton.“Trusts aren’t really that great anymore ever since the government changed the rules on testamentary trusts, and they’re costly to set up,” he said. “With a universal or whole life plan, you can invest money within the policy and then transfer it, tax-free, to your child either through your estate or you can do it before you die.”

Financial planning for new parents

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