When you’re working full-time, it’s easy to put retirement savings on auto-pilot: sign up for the 401(k) plan at work, have your contribution deducted from your paycheck, and (hopefully) watch the account grow. But when you make the decision to be a stay-at-home mom, you still need a plan for saving for retirement. Just because a company isn’t matching your contributions any more doesn’t mean there aren’t options. Here’s what you need to do:
Ask the First Question
How much can you afford to contribute? There may be IRS-imposed limits on the amount you can contribute to certain types of accounts, but first figure out what you can afford to set aside. Don’t get discouraged if the amount you can contribute each month is small right now. It’s better to get started with small numbers now rather than wait until you have a larger amount to contribute later and lose out on the power of compounding returns.
Roll Over Your Old 401(k)
When you leave an employer, it may be tempting to leave your 401(k) balance sitting in their plan, but it’s a bad idea. For one, you’ll have more options and flexibility if you roll the account into an Individual Retirement Account (IRA). Second, you won’t get a surprise down the road if the company is sold or terminates their plan. Take it from me. A few years ago I left a job and left my money in the company’s plan for over two years. Between changing jobs, having a baby and moving out of state, setting up a new account was the last thing on my mind. One day I received a notice that my former employer had been purchased by a national firm and I had 30 days to roll it into another account or they would issue a check and withhold 25% of the balance for taxes! Eek!I had to scramble to get an IRA set up and the funds rolled over. Lesson learned.
Even worse than leaving the money where it is, is cashing it out. You’ll pay taxes on the full balance of the account, plus a 10% penalty for early withdrawal. Talk to a financial advisor or your bank if you need help setting up an IRA or set one up online through Fidelity, Vanguard, Sharebuilder, or a number of other investment banks.
What Kind of Plan Are You Eligible For?
The type of account you are eligible for generally depends on your income level and whether or not you have any income from self-employment. If you are not employed but your spouse works, you can set up a Spousal IRA. Typically, you can only contribute to an IRA if you have earnings from employment, but with a Spousal IRA, as long as you file a joint return with your working spouse, you can contribute up to $5,500 per year. The Spousal IRA can be either a Traditional IRA or a Roth IRA. With a Traditional IRA, you get the tax benefit now, as the contribution is deductible on your tax return in the year you make it, but the distributions you take in retirement are taxable. With a Roth, there is no tax benefit for the contributions now, but the money comes out tax free in retirement. Many financial advisors recommend a Roth over a Traditional IRA because chances are your tax rate in retirement will be higher than it is now. You may be unable to contribute to a Roth if your income is too high.
If you have income from self-employment, you may consider setting up a Simplified Employee Pension (SEP) IRA because the contribution limit is higher. The amount you can contribute depends on how much you make from self-employment. The maximum contribution is 20% of your self-employment income after SE tax deduction, up to a maximum of $53,000 for 2015.
What NOT to do.
If you are married, it may be tempting to forego your own retirement account and max out your spouse’s 401(k) contributions instead. This plan only works if you are together to and through retirement. We never like to plan for the worst, but the account is called an Individual Retirement Account for a reason. These are not joint retirement savings accounts. In the case of a divorce, you may be entitled to a portion of your spouse’s retirement funds, but the legal battle to get that can be painful and arduous. As a stay-at-home mom, caring for your family is likely your #1 priority, but don’t forget to take care of yourself and your retirement! Plan now to enjoy the life you want in the future.