Three Retirement Planning Tips For Stay-At-Home Parents
Whether it is due to personal preferences or financial necessity, many families decide to have one parent serve as the primary caregiver for their children. Stay-at-home parents are increasingly common as families try to manage their household and care for their kids in a way that works for them. However, stay-at-home parents face a unique situation when it comes to planning for retirement. Check out these tips that stay-at-home parents can use to plan for a secure retirement.
1. Open a Spousal IRA
As a stay-at-home parent, you do not have access to conventional workplace retirement plans, such as the 401K. Though an IRA is usually only an option if you have earned income, special considerations are made for spouses who do not work.
Non-working spouses have the ability to open an account known as a spousal IRA. You can open a traditional or ROTH IRA .
Traditional IRAs are made with before tax dollars; this means that you pay taxes on the money in retirement.
ROTH IRAs are made with after-tax money; you pay income taxes on the contributions now, but when you retire, you can withdraw the earnings and contributions tax-free.
As of 2016, if you are under 50 years of age, you can contribute up to $5,500 a year to a spousal IRA. Spouses who are over 50 may contribute $6,500 each year.
2. Be Responsible with Your Old Retirement Accounts
When you need cash, it is tempting to cash out your old 401K or IRA. However, by cashing out the account before retirement, you are losing out on thousands of dollars.
In cases where you access a 401k or IRA before retirement, expect to lose a significant sum of the money to penalties and taxes. You must pay taxes on the money at your current income tax rate, in addition to a 10 percent penalty for accessing the funds before retirement.
Not only do you lose money from taxes and penalties, but you also miss out on years of compounding interest. Over time, your account will earn interest. This interest is added to your balance, and you then earn more interest off your previous interest amount.
3. Consider Using Non-tax-advantaged Accounts to Save for Retirement
If you plan to retire before age 59 or want to save more for retirement than permitted by a spousal IRA, it may be wise to incorporate non-tax-advantaged accounts into your savings plans.
Options for non-tax-advantaged accounts include taxable investment accounts, savings accounts, certificate of deposits, and money market mutual funds. Though you do not get the same tax benefits on these accounts as you do for accounts intended to save for retirement, they offer flexibility. You can access your funds when needed without penalty, though you do have to pay the appropriate tax on the funds. For more information, talk to a professional like Estate & Financial Strategies, Inc.