Retirement is often talked about in the context of leaving the workplace. It marks the end of a regular paycheck and the need to begin relying on other sources of income, most notably savings.
At least that's how it works for many people, including employed couples who each earned income. But in one-income marriages, the future retirement needs of the stay-at-home spouse are comparable to those of the working partner, and living expenses for both must be accounted for—all without the benefit of that second paycheck.
A household's retirement strategy should include a plan for both people, regardless of earnings from outside the home.
The government has long recognized the value of stay-at-home spouses: Through Social Security, married people who may not have earned significant income outside of the home can collect a "spousal" benefit at retirement.
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This benefit generally amounts to 50 percent of the monthly Social Security payment received by the working partner. The actual amount will vary, depending on the age at which benefits are first claimed. If the primary Social Security recipient dies, the larger benefit he or she received—rather than the smaller spousal benefit—is paid to the survivor instead.
Of course, Social Security alone will not sufficiently meet the financial needs of most retired married couples. Therefore, both partners will need to build retirement savings in other ways to round out their income needs later in life. Fortunately, stay-at-home spouses have additional retirement-savings options—even if they never received a regular paycheck.
The fundamental rule of an individual retirement account is that you can't contribute to one unless you have earned income, or wages. But one notable exception allows a stay-at-home spouse to establish a so-called "spousal IRA" even if he or she has not received any income in the current year.
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This IRA option is largely dependent on the income and employment status of the partner who is the primary income earner. Some factors to consider are:
- Does the working spouse earn enough income to make contributions for the nonworking member of the couple?
- Can the income earner participate in a retirement-savings plan at work? If so, there are income limits for the household that will determine if spousal IRA contributions are deductible.
- The money could be directed to a Roth IRA if the household falls within the income requirements to qualify for Roth contributions. The advantage is that a Roth IRA allows money to grow tax-deferred and to be withdrawn on a tax-free basis, if certain holding-period requirements are met.
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A traditional IRA nondeductible contribution—which has no upfront tax deductions but its earnings will be taxable upon withdrawal—is always an option for a spousal IRA, as well. It's always a good idea to check with a tax advisor to find out what options are available.
Self-employed individuals may have additional flexibility in funding their stay-at home spouse's retirement. For instance, a stay-at-home partner may be able to provide services to his or her spouse's business while still remaining primarily at home.
If a salary is paid, he or she can also potentially participate in the company's retirement plan and build savings there. So, doing things to help out at the family business—such as general office duties, bookkeeping and bill paying—may be appropriate.
This approach can help a couple keep more of their income sheltered from current taxation while solidifying their financial future. It is a major advantage for married couples where one partner owns a business.
It is possible that financial accounts can become one-sided over time, if one spouse works for years while the other holds down the fort at home. But the family breadwinner does have flexibility in giving cash or stocks as gifts to the spouse. Under current tax laws, there are generally no gift-tax consequences for transfers from one member of a married couple to the other.
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Alternatively, some accounts can be set up in joint tenancy, which can be another way of making a gift. These would include bank and brokerage accounts. However, an IRA or workplace retirement plan can only be in the name of one person.
Stay-at-home spouses and their working partners do have options when it comes to building income for, and in, retirement. But they need to start the work long before they get there.
—By Rebecca Hall. A certified financial planner, Rebecca Hall is a private wealth advisor with Ameriprise Financial.
