By Anna Wroblewska.
Are you a stay-at-home parent? Whether you're new to the job or have been in it for years, one thing you shouldn't forget about is retirement planning. Here's how you and your spouse can make the most of your options to help ensure a healthy financial future as a retiree.
First things first: Get out of debt
Before you do anything else, get out of debt and make sure your family has a solid emergency fund. Debt doesn't mean your mortgage or the family car; it means that credit card balance that's eating away at your family's income with interest charges. Make paying off high-interest debts your top priority.
In addition, turn your attention to your family emergency fund. Many advisors recommend having about six months' worth of living expenses in an accessible savings account. Talk to your spouse about your family's needs and your own preferences, and find ways to start saving. Many stay-at-home parents are already masters of finding creative ways to cut down costs, whether it's eliminating unneeded luxuries, using coupons, or shopping around for better deals on big-ticket items like insurance. It might feel like a burden at first, but it's for a good cause!
You might want to set aside a small amount while you're paying off any debt, but once those debts are off the books, you can redirect that money to your savings account, helping it grow faster.
Once you've tackled those immediate issues, you're ready to start saving.
Three ways to save
There are a few ways to accrue retirement savings, but savings vehicles typically require "earned income," meaning wages, tips, or other earnings. Now, we all know you're working (after all, you're on call 24 hours a day!), but to get the most out of your retirement planning options, you'll want to team up with your spouse.
1. Take advantage of your spouse's 401(k)
If you haven't this already, the easiest way to boost your retirement savings is to talk to your spouse about raising his or her 401(k) contributions. The annual contribution limit is $17,500 for 2014. This might be a simple and easy starting point if you don't want to deal with opening additional accounts, as it only requires a quick adjustment with the human resources department.
By maxing out your spouse's 401(k) contributions to the extent possible, the two of you are getting all the benefits of tax-deferred retirement savings without any of the hassle of organizing additional contributions to separate accounts. The contribution is automatically deducted from your spouse's paycheck, and there's nothing more you need to do.
Of course, you might be concerned about having your own assets in the event of unforeseen circumstances, like a divorce. Generally speaking, retirement assets are part of divorce settlements, even if they only have one spouse's name on them. Depending on your state, this might involve an automatic 50-50 split or a "fair and equitable" one. Nonetheless, many people still prefer to have at least some retirement savings assets in their own name.
This brings us to our next option.
2. Set up a spousal IRA
The spousal IRA is a great way to help you build retirement savings. Spousal IRAs are specifically for non-working or part-time-working spouses who would otherwise not be able to contribute to a qualified retirement account.
Depending on your income level, you have the option of opening a traditional spousal IRA or a Roth spousal IRA. The traditional IRA is tax-deferred, meaning that you don't pay taxes today on any contributions but you do pay income taxes on withdrawals in retirement. The Roth IRA is the opposite: It requires after-tax contributions (meaning your family will pay taxes on the amount you contribute), but when you retire, your withdrawals from the account are tax-free.
Whether or not the Roth makes sense for you hinges partly on your income level (the Roth option is phased out at a modified adjusted gross income of $188,000 per year) and partly on what you think will make sense for your family later on. If you expect your household income to be higher in retirement, you may prefer the tax-free withdrawals offered by a Roth IRA; if you expect it to be lower than it is today, you might be better off deferring income taxes until later with a traditional IRA.
Your spouse can contribute up to $5,500 in 2014 to an account in your name, provided you file a joint return. Your spouse can also contribute the same amount to his or her own IRA, raising your combined IRA contribution limit to $11,000. The limit goes up $6,500 per person if you're age 50 or older.
3. Open a taxable brokerage account
Have you and your spouse been able to maximize your savings through your spouse's 401(k) and your spousal IRA? In that case you might want to consider opening a taxable brokerage account on top of this for additional savings. You could open the account in both of your names or in one name only -- whatever best suits your situation.
While you and your spouse will pay taxes on the money you set aside, as well as any realized capital gains, you might find that this is a great way to top up your savings and set aside a bit extra for long-term growth.
Whatever you do, don't forget to make it a priority
Whatever course of action you choose, don't lose track of retirement planning, even if you only plan to stay out of the workplace for a few years. You never know what the future might bring, and you'll feel great knowing that you've made your family's long-term financial health a priority.
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