Although we are living in a time where more and more women are earning just as much or even more money (what’s up ladies!) than her husband, there will of course be those families who rely primarily on just one spouse’s income at least for some period of time. If you are fortunate enough to have taken a break from your career to raise children or maybe work part time while your kids are at school, you probably aren’t contributing to a retirement plan (IRA, 403b or 401k) like you once were when you were earning a higher income, simply because the plan is no longer active anymore or because the income you’re earning isn’t enough to qualify you. These days, who doesn’t have a friend who traded in their salary-paying corporate job for one in direct sales representing makeup or clothing? We all know someone on our newsfeed who’s selling something from her couch while her kids nap. It’s amazing. And then we have those moms who go back to school when her kids are finally off to school because now she has the time. You are doing big things for your family’s long term success and we admire this!
But keep things balanced; just because you don’t have an active 401k doesn’t mean you can’t continue to save for retirement. Don’t let your financial retirement plans get stuck on the back burner during all of this. The only thing that belongs on the back burner is that simple and delicious chili recipe you found on Pinterest that can be stirred in between checking emails and chasing kids around the house. Definitely not your savings. So what should you do?
If you and your partner are in a position where you are willing and able save more than what’s allowed in his plan alone (IRS provides for contribution limits) even if only he is earning money at the moment, you two might want to consider doing more than just putting this extra savings in the bank. There’s a few reasons for this: 1. Money in the bank earns virtually no interest and 2. Money in an individual or joint savings account is not providing you any tax advantages.
Assuming you’re one of those women we mentioned above (not currently eligible to contribute to an IRA or 401k) your spouse can actually open an IRA for you. It’s called a Spousal IRA. You must be married and filing jointly for this to be allowed and if so, his earnings can be put into your Spousal IRA. It’ll be opened under your name and social, but funded from his or the household income. Doing this will provide tax advantages (either today or down the road depending on if you open a Traditional or Roth Spousal IRA) as well as enable the two of you to put more tax-qualified money away than you would otherwise. So now you are stashing money into his 401k through work, taking full advantage of his employer’s match (hopefully) plus you can put another $5,500 in this account while getting the same tax treatment even though you may have only earned $4,000 or $0 this year, for example. You should discuss these and other rules, allowances, and restrictions with a professional to determine if this solution is right for you. If you think you might fit into this scenario, take the next step and discuss your unique situation with your advisor. Don’t have one? Contact us. You can also add your questions and comments below. We love hearing from you!
PS. If you’re single and making bank all on your own, good for you! Go ahead and max out your 401k (or SEP if you’re self employed).
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice. This information is not intended to be a substitute for specific individualized tax advice. Neither SagePoint Financial Services, Inc., nor its registered representatives, offer tax advice. As with all matters of a tax related nature, you should consult with your tax professional.