What do couples do for retirement in a single income household? My husband recently lost his job and has decided to pursue a stay at home dad role while kids are young. In this scenario, does he have any options I can contribute to for retirement? Or is my only option to continue to max out my own employer retirement account hoping this is enough for both of us?
Many families are faced with the decision of one parent leaving the workforce (willingly or otherwise) to take on stay-at-home parenting duties. The process usually entails some budget crunching to ensure any needed lifestyle changes are known and accounted for and making sure the designated parent really wants to commit to making the change.
What often goes unconsidered by most couples is the retirement contributions that are typically foregone by the newly minted stay-at-home parent.
“But, they’re planning on going back to work when the kids go to school. How much difference could a few years make, anyway?” I’m glad you asked.
For the purposes of this example, let’s assume the stay-at-home parent is 27 when they begin their new role. And, as often happens, one child at home becomes two children (or more) at home and the length of time out of the workforce grows a bit. In our case, we’ll say that the stay-at-home parent is out of the workforce for 7 years, or until they turn 33. Next, we’ll assume that they were saving $5,000 a year into their retirement plan between their contributions and their employer’s match. If we use 8% to calculate their long-term returns, I think the answer will surprise you. In this situation, the contributions the stay-at-home parent doesn’t make would have grown to $659,663 at age 67.
Yes, those 7 years of retirement contributions matter.
What options do families have if they want to contribute towards retirement for a stay-at-home parent? It’s completely legal for a working spouse to make IRA contributions for their partner on their behalf. This is more commonly known as a “Spousal IRA”.
In order to qualify to make contributions into a Spousal IRA, the couple must file a joint tax return. That’s it. Additionally, Spousal IRAs can be either Traditional or Roth flavored and are subject to the normal contribution limits, catch-up contributions, and income limits. The account will be registered in the stay-at-home parent’s name.
If you’re maxing out your employer-provided retirement plan, I would encourage you to look at the income limits for Traditional IRA deductibility and Roth IRA eligibility. Don’t get too discouraged if you don’t qualify for making a deductible Traditional contribution or a Roth contribution. You can always go through the back door. You’ll have to go through a couple of extra steps, but you can make a non-deductible Traditional contribution and then convert that contribution to a Roth IRA. This is more frequently referred to as a “backdoor Roth”. Is this a workaround of current laws? Yes. Does the IRS know about it? Yes. Is it really a viable Roth funding method for those who can’t otherwise contribute to a Roth? Absolutely. If you have a financial advisor or broker, contact them if you want to discuss this option and how it fits into your long-term plans. If you don’t have an advisor or broker (if you have an account at Vanguard, for example), brokerage houses will occasionally offer help with the logistics making sure everything is done appropriately.
If your hubby decides to go back to work after the kids are in school, he’ll have the option of contributing to the new employer’s plan, continuing contributions to his IRAs, or possibly both. Which option will be best? Well, make sure he contributes at least the minimum to get the match from his employer. Then, look at the quality of the available investment options and their costs for each type of account, and the picture should get a little clearer for you. Make sure you concern yourself just as much (if not more) with how much you’re saving and not just where you’re saving.
Good luck to you and your family!
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.