By Derrick Kinney
Contrary to popular belief, retirement planning is not just for employed wage earners. Spouses who forgo a paycheck to stay at home need a financial safety net just as much as their working counterparts. Planning for the financial security of a nonworking spouse can help ensure there is replacement income if circumstances change. Here are some potential strategies for you to consider.
Realize that Social Security is only a partial solution. Even if a stay-at-home spouse never generated much income over the years, Social Security can provide a measure of financial assistance at retirement age. Generally, these benefits will be equal to half of the benefit paid to the working spouse, and if the wage earner should die, a surviving spouse may receive even higher survivor benefits (in lieu of the spousal benefit). Yet government-supplied benefits typically are not sufficient to cover all of the costs of living during retirement and must be supplemented by additional income. For this reason, it’s important to start saving — sooner, rather than later.
Funding an IRA. IRAs can be a good choice for retirement savings because they may offer valuable tax advantages. The spousal IRA was created specifically for non-wage earners who rely on spousal support. The method of saving with a spousal IRA will depend on whether the income earner in your family is eligible for an employer-sponsored retirement plan.
Essentially, an income earner can make deductible contributions (up to an annual limit per IRS rules) to a spousal IRA if he or she is not eligible to contribute to an employer-sponsored retirement plan. However, if the working spouse is eligible for plan participation, there are income limitations that affect the deductibility of spousal IRA contributions. In this situation, a nonworking spouse may only deduct contributions when the couple’s modified adjusted gross income (AGI) is under $169,000. (Deductibility is phased out at $179,000).
The IRS allows a working spouse to contribute to a Roth IRA on behalf of a nonworking spouse, with similar income guidelines as a traditional IRA. It’s also possible to make contributions to a traditional IRA on behalf of a nonworking spouse and then convert the savings to a Roth IRA to allow for tax-free withdrawals at retirement age. Talk to your tax advisor about the short- and long-term tax consequences of a conversion strategy.
Gifting. The IRS gets flack for a lot of things, but they can’t be faulted for their spousal gift policy. Married couples can give freely to one another without gift tax consequences. The only caveat is that they must both be U.S. citizens. So if the wage earner wishes to create a more equitable distribution of assets, he or she is free to do so. As an alternative to making outright gifts to your spouse, you may also choose to hold assets in joint tenancy. With joint tenancy, the nonworking spouse shares in the assets and therefore has some financial protection in case the relationship changes or the working spouse dies.
Hiring the non-working spouse. Working spouses who are business owners may want to consider hiring the nonworking spouse to realize certain financial advantages. As an employee, the spouse may qualify for the business’s retirement plan—if one exists. In addition, the spouse may generate income that can be put toward saving for the future.
Evaluate insurance coverage. Many families realize the importance of insuring a working spouse to provide ongoing income in the event of injury, illness or death. But nonworking spouses often make important contributions (such as childcare) to running the household that would be expensive to replicate in their absence. Evaluate your insurance levels to ensure adequate coverage for unexpected events in the lives or health of both spouses.
Make retirement planning — for both of you — a priority. Life is unpredictable, which is all the more reason to build and grow a retirement nest egg that will be sufficient for both of you, regardless of who brings home the bacon. Talk to your financial advisor to explore your options.
For more information, email Derrick at derrick.t.kinney@ampf.com..
