Four Tax-Advantaged Accounts Every Parent Should Have

Every parent knows just how expensive raising kids is. From diapers to daycare to food to clothes to college tuition, everything a child needs-not to mention wants-seems to cost a small fortune. Smart parents are always on the lookout for ways to stretch and save the few spare dollars they have.

Fortunately, there are several types of tax-advantaged accounts that can help parents keep more of their hard earned dollars and save on their tax bills as well. Every parent should have individual retirement accounts for themselves and their spouse, medical and dependent care flexible spending accounts and a Coverdell Education Savings Account for each of their children. The tax and financial benefits these accounts offer are enormous.

Traditional Individual Retirement Account (IRA)-The best thing about individual accounts is you get not one, but two, tax benefits from them, and, if you invest wisely, you have the possibility of generating a substantial return on your investment. With traditional IRAs, taxpayers and their spouses who qualify may deduct up to $4,000 ($5,000 if you are 50 or over; $7,000 if you participated in a 401k plan maintained by an employer who went bankrupt in a previous year) in contributions to a traditional IRA. Even better, taxpayers who qualify can take a dollar for dollar retirement savings contributions credit (saver's credit) of up to 50% of the first $2,000 you contribute to an eligible retirement plan. This is an opportunity to build wealth while saving on taxes that no parent can afford to pass up.

Medical Care Flexible Spending Account (FSA)-From over the counter (OTC) medications to major surgery, at some point every family takes on medical expenses. Because they reimburse you for things you would have paid for anyway (effectively putting money back in your pocket) and they reduce your tax liability by reducing your taxable income-for some families, the reduction in taxable income makes it possible for them to qualify for the Earned Income Credit and reduce their tax liability even further, or even qualify for a refund if they don't owe any taxes- flexible spending accounts are some of best tax-advantaged benefits available. Medical Care FSAs can reimburse you for everything from prescription medications to special education services for a disabled dependent.

Dependent Care Flexible Spending Account (FSA)-Dependent Care FSAs can be a real lifesaver for working parents of children who have children under the age of 13 (or children of any age who have a disability). Like their medical care counterparts, Dependent Care FSAs provide both reimbursement of pocket expenses and a reduction in taxable income. Some of the expenses you can be reimbursed for with Dependent Care FSAs include au pairs, nannies, in home day care providers, center-based day care providers, nursery school, private preschool, before- and/or after- school care and day camps. You can even be reimbursed for paying an adult relative who is not your dependent to care for your child. As an added bonus, you may also be able to claim a child or dependent care credit for dependent care expenses that are not reimbursed by your Dependent Care FSA.

Coverdell Education Savings Accounts (ESA)-Coverdell ESAs are the best thing going when it comes to education savings vehicles. Qualified taxpayers can contribute up to $2,000 annually to Coverdell accounts for their beneficiaries. The coolest thing about Coverdell accounts is that they aren't just for higher education: proceeds from Coverdell accounts can be used to pay elementary and secondary educational expenses at public, private and parochial schools. How cool is that! You don't get any tax deductions for contributing to Coverdell accounts, but, then again, you don't have to pay taxes on distributions from them as long as they are used to pay qualified educational expenses. Qualified education expenses include tuition, fees, books, supplies required for enrollment or attendance and, in some cases, room and board.

Be sure to take advantage of these wonderful tax-advantaged benefits. Flexible Spending Account contributions are deducted from your paycheck by your employer on a pre-tax basis. If you're wondering where to get the money to invest in Traditional IRAs and Coverdell ESAs, start by cutting back on everyday expenses, and depositing the money you save by living more frugally into Traditional IRAs, Coverdell ESAs and high yield savings accounts. Don't forget to deposit a large chunk of your annual tax refund into savings vehicles to grow your wealth even faster.