Retirement and Tax Planning Strategy for Stay-at-Home Parents


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This article originally appeared in the financial education center on Prudential.com. For more than 140 years, Prudential Financial has helped individual and institutional customers grow and protect their wealth. Prudential is known for delivering on its promises to its customers, and is recognized as a trusted brand and one of the world’s most admired companies** .

Key Takeaways

  • Stay-at-home parents can fund IRAs if their spouse works and the couple files taxes jointly.
  • Such retirement savings may be tax deductible, depending on your MAGI.
  • Stay-at-homers have until Tax Day 2020 to contribute to IRAs for 2019.

When Tim and Jennifer* welcomed their third child into the world, they knew it was time to reassess the type of life they wanted for their family. Tim’s job as a personal trainer demanded that he meet with clients early in the morning, at night and on weekends. Jennifer’s demanding job as a lawyer also meant lots of stress and an unpredictable workload. The couple intentionally chose to have three children close in age because they shared the dream of building a close-knit family full of love and laughter.

But when they took a step back to consider the reality of their lives as two working parents, they felt their values had somehow gotten buried. They were spending more time at work than with their young children. Even worse, they spent more money on childcare than seemed logical, based on Tim’s income.

Once they crunched the numbers, Tim and Jennifer realized that, with careful budgeting, they could afford for Tim to stay at home with their three young children. Relieved that they were in a financial position to designate Tim as the stay-at-home parent, they had only one major concern: How could they continue to build on the retirement savings momentum they’d established in their early 20s, to achieve their dream of retiring by the time they were 60 years old?

The decision to become a stay-at-home parent means a number of changes to family dynamics and shared finances — but it doesn’t have to hinder either spouse’s retirement goals. Despite the fact that stay-at-home parents no longer earn income from an outside source, they may be eligible to contribute up to $6,000 to an individual retirement account, or so-called spousal IRA, each year. Plus, that contribution may present some additional tax advantages.

Here are some opportunities that families like Tim and Jennifer’s should consider as part of a retirement and tax planning strategy when one parent stays at home to help raise the kids.


Confirm You Qualify

While a stay-at-home parent may not receive a paycheck and similar employer-sponsored workplace benefits, the Internal Revenue Service does allow nonworking spouses to make annual contributions to a traditional individual retirement account and/or a Roth IRA, based on the couple’s modified adjusted gross income (MAGI), if the pair meet at least these basic criteria:

  • One spouse must earn income
  • The couple must file taxes jointly
  • The working spouse must have earned income that exceeds the sum of the nonworking spouse’s contribution, plus the working spouse’s contribution.

If you meet these basic qualifiers, the next step is to explore which types of retirement contributions will best support your retirement savings goals.

Calculate how much (and how) each of you can save

Although annual retirement contributions can help savers build the retirement savings account balance they need to feel prepared for retirement, not all retirement contributions yield tax benefits. Whether they will or not depends on a number of factors, including the type of retirement plan the working spouse may be eligible to participate in through an employer or self-employment, and the couple’s MAGI.

To make sense of the IRS rules around retirement saving opportunities for stay-at-home parents, consider how Tim and Jennifer could be impacted, based on the following scenarios.

1. Jennifer Has No Workplace Retirement Plan

The IRS rules say that Tim and Jennifer are each eligible to contribute up to $6,000 total to either a traditional IRA, a Roth IRA or a combination of both for 2019, provided Jennifer earned more than $12,000 in 2019.

In this scenario, specific to the traditional IRA, if Jennifer’s law firm employer did not give her the ability to participate in an employer retirement plan, then because neither spouse is covered by a retirement plan at work, their MAGI does not come into play: Both Tim and Jennifer can deduct their full traditional IRA contribution amounts from their 2019 married filing jointly tax return.

2. Jennifer Participates in Her Employer’s 401(k) Plan

Jennifer is eligible to contribute up to $18,000 of her pretax income to her employer’s 401(k) plan for the 2019 tax year. (In turn, she benefits from lowered taxable income.) Even if Jennifer “maxes out” her 401(k) plan, she’s also eligible to contribute up to $6,000 total to a traditional and/or Roth IRA in the 2019 tax year.

In this scenario, because Jennifer is covered by a plan at work, their MAGI matters: If the couple’s MAGI is $103,000 or less, Jennifer can deduct the full amount of her traditional IRA contribution. If their MAGI is more than $103,000 but less than $123,000, she’s entitled to a partial deduction, and if their MAGI is $123,000 or more in 2019, she can still contribute up to $6,000 to a traditional IRA, but she cannot deduct the contribution on their 2019 married filing jointly tax return.

Tim can also contribute up to $6,000 total to his own traditional and/or Roth IRA for the 2019 tax year. Because Tim is not covered by a plan at work, but Jennifer is, if their MAGI is more than $193,000 but less than $203,000, he’s entitled to a partial deduction of his traditional IRA contribution. If their MAGI is $203,000 or more, he can still contribute to up $6,000 to a traditional IRA, but he cannot deduct the contribution on their 2019 married filing jointly tax return.

3. There Are Limits on Roth IRA Contribution Amounts

In either of the two above scenarios, specific to the Roth IRA (the contributions to which are not tax deductible), the amount Tim and Jennifer can contribute to a Roth IRA will be reduced if their MAGI is at least $193,000 and less than $203,000. If their MAGI is $203,000 or more, neither is eligible to contribute money to a Roth IRA for 2019.

What You Can Do Next

If your family includes a stay-at-home parent, don’t forgo retirement contributions just because you don’t get a paycheck. Depending on your combined income, you may be able to contribute to a traditional IRA, Roth IRA or both. But act fast: You have until Tax Day — April 15, 2020 — to make and apply IRA contributions to the 2019 tax year.

If you need to open an IRA account for this purpose, give yourself several weeks to choose a provider, complete the paperwork and get it funded so you don’t miss out.

Note that income limits, IRA contribution limits and 401(k) plan contribution limits are for 2019 and are indexed for inflation.
Please consult your tax and legal advisors for advice pertaining to your particular circumstances.

* Tim and Jennifer are a fictional married couple, in their early 30s.

** As of January 2020. FORTUNE® and “The World’s Most Admired Companies® are registered trademarks of Time, Inc.

©2020 Prudential Financial, Inc. and its related entities. Used by permission. Prudential is not maintaining or updating this content and disclaims any liability to any party for the accuracy or completeness of the content.

 

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