As a stay-at-home mom, there are certain aspects of office culture that you're probably used to forgoing. The water cooler gossip, for example, or the 3 p.m. birthday cake breaks.
The one thing you should never forgo, however, is planning for retirement. Just because a company isn't matching a 401(k) contribution for you doesn't mean there aren't a lot of other options out there.
(For more on how 401(k)s work, check this out.)
Whether or not you work, it's vital that you secure not just your children's and spouse's future, but your own as well.
The first step to setting up retirement savings as a stay-at-home mom will probably be making some room in your budget. Head to the My Money Center to find out how you can better reallocate your spending folders. Keep the following questions in mind before you do so:
- How much can you contribute annually?
- What plans are you eligible for?
- Does it make the most sense to save in a traditional retirement account, a Roth-type retirement account or both?
Consider these options to help you answer the questions above:
Roll Over your 401(k)
Many people who leave the nine-to-five workforce either leave their 401(k) plan with their old employer or cash it out. Unfortunately, both are bad ideas.
The first option basically leaves money behind, and the second will stick you with penalty fees for cashing out your retirement funds early (when you still ultimately want to use them for retirement, anyway). Instead, roll your old 401(k) over into an IRA. You won't be hit with taxes and penalties, and you will have more withdrawal and investment options than in your old employer's plan; you can withdraw funds from an IRA for qualified educational purposes before you turn 59.5 without incurring the 10% penalty.
While we don't advise you to withdraw from your retirement funds to pay for your children's college (after all, you or your child can always take out loans for college, but you can't for retirement), this is one of many incentives to rolling over your 401(k).
Open a Spousal IRA
If you're under 50, this option allows your spouse to contribute up to $5,000 per year to an IRA in your name, and as much as $6,000 if you're 50 or older. The IRA can be either a Roth or traditional, the main difference being that a traditional IRA lets you deduct contributions, whereas a Roth gives you the tax savings on the other end by letting you make tax-free retirement withdrawals when you're ready to retire.
To be eligible for a spousal IRA, you must file a joint return. Your maximum contribution decreases, and ultimately phases out, if your adjusted gross income ranges from $173,000 to $183,000 (tax year 2012). However, if you happen to earn additional income from self-employment, you may be able to set up a SEP IRA or individual 401(k) for yourself.
Open an Individual 401(k) or SEP IRA
If you have a home-based business and report that business on your taxes (you should), you are probably eligible to set up an individual 401(k)--also known as a "solo 401(k)," and "self-employed 401(k)"--or SEP IRA. The amount you can contribute is determined according to how much profit your business makes, and cannot exceed $50,000 for either plan in 2012.
For example, if you're the sole proprietor, you can contribute up to 25% of your net self-employment income to the SEP IRA, not to exceed $50,000 for 2012. The contribution calculation is similar with an individual 401(k), except that you also have a salary deferral portion. Because you are both the employer and the employee, you can contribute a "salary deferral" portion, up to $17,000 of your net self-employment income, on top of a profit-sharing contribution of up to 25% of your net self-employment income.
Like the SEP IRA, the maximum total contribution to an individual 401(k) plan is $50,000 for 2012. That said, due to the unique way contributions are calculated, some people can contribute more to an individual 401(k) than they otherwise could to a SEP IRA. Plus, if you prefer the Roth approach, you can open a Roth individual 401(k), in which contributions are not tax-deductible, but withdrawals are tax-free. In fact, this is a great opportunity if your salary makes you ineligible to open a Roth IRA, as there are no similar salary restrictions with a Roth 401(k).
Each plan has a unique set of benefits, and they should be compared thoroughly to see which best fits your specific situation. For example, if you feel strongly about paying taxes now instead of later, you may want to open a Roth 401(k), especially if you're maxing out your current Roth IRA or are ineligible for one. The individual 401(k) also provides the added benefit of allowing you to take loans from your retirement savings, as long as you establish that in the plan documents when you're setting it up. On the other hand, an individual 401(k) can be more expensive to maintain, and requires more administration than a simple SEP IRA.
Increase Your Spouse's Contributions
If your spouse is currently contributing to his employer's 401(k), consider increasing that contribution. The maximum contribution for 2012 is $17,000 if you are under the age of 50 and $22,500 if you are 50 or older.
A word of warning, though: This maneuver only works well if the two of you are together into and through retirement. In the case of a divorce, you will still have rights to a portion of his retirement funds (the distribution will depend on your state), but it can be an arduous and painful process exercising those rights. That said, increasing his contributions is a strong option if you've already opened and are contributing the maximum to a spousal IRA in your name.
Purchase a Non-Qualified Variable Annuity
Unlike the qualified retirement plans discussed above, you can't deduct contributions made to a non-qualified annuity (which is an account you open with an insurance company), and you can't take tax-free withdrawals during retirement. What an annuity does give you, however, is tax-deferred growth that is not subject to an annual contribution limit set by the IRS. Note that it is still subject to early withdrawal penalties levied by the annuity company, as well as the IRS.
There are a multitude of investment options available through variable annuities; just make sure to check the investments that the annuity holds and the expenses, as they can be high. Also, make sure you know how long the surrender period (or the amount of time an investor must wait until he or she can withdraw funds from an annuity without facing penalty) is, and that you don't get sold on unnecessary insurance riders, as the cost for these can be steep. What is or isn't necessary will depend on your particular situation, but if you're a single person saving for retirement, getting anything beyond the basic death benefit would probably not be a good use of your money.
This option should be your last resort, since tax-qualified plans, such as the IRA and 401(k), offer significant tax savings when you make contributions or take withdrawals, and can be significantly less expensive.
Holly Mangan is an editor for Money Crashers Personal Finance, where she coordinates financial topics like money management, investing, and retirement options.