Many parents make the decision that after their child is born one parent will stay at home to be with the child. Some of the reasons include saving on daycare expenses, and wanting at least one parent to bond and be with the child during those precious first few years of development.
Whatever the reason, the stay at home parent may leave a job and lose access to certain benefits – mainly their employer sponsored retirement savings plan. Although the stay at home parent has lost this benefit, it doesn’t mean that they have to stop saving for retirement.
One benefit the stay at home parent can take advantage of is the spousal IRA. Spousal IRAs aren’t a specifically titled IRA. In other words, the IRA needn’t be titled “Spousal IRA”. It’s simply an IRA in the stay at home parent’s name – no different than if they had an IRA and were currently working.
Generally, in order to contribute to an IRA a person needs to have earned income. This means W2 wages from employment. Since the stay at home parent is no longer working, this may seem like an insurmountable obstacle. The solution however is pretty easy.
The stay at home parent can still contribute to the Traditional IRA or Roth IRA as long as the working spouse has enough earned income for the stay at home spouse to make a contribution. For example, let’s assume that Mary is a stay at home parent and her husband Hank works a full time job earning $60,000 per year. For 2015, both Mary and Hank can make maximum IRA contributions of $5,500 to each of their IRAs (we’re assuming they’re under age 50). Hank is able to contribute off of his earnings and Mary is allowed to contribute since Hank has enough earned income and Mary takes advantage of this as his spouse.
Although Mary may have lost access to her prior company’s 401k plan, she can still save for her retirement as long as Hank has enough earned income. Finally, Hank and Mary’s contributions are limited to Hank’s earned income for the year. In other words, if Hank only had earned income of $8,000 for the year, he could put $5,500 in his IRA and only $2,500 in Mary’s IRA for a total of $8,000 – his maximum earned income for the year.
More information on IRAs and spousal IRAs can be found here. Or check out Jim’s book, An IRA Owner’s Manual.