A Glimmer of Retirement Hope for At-Home Moms During the Ongoing COVID Crisis
It’s not the most wonderful time of the year for most of us—it’s tax season. Ugh. Time to reckon with your income and how much went to federal and state taxes. Time to dig through piles of papers and online accounts to find those pesky 1099s and W2s. And figure out additional complications from the never-ending COVID crisis like stimulus checks, child tax credits, and unemployment. One important item you won’t want to overlook this year is the Spousal IRA.
Keep your retirement savings on track
At-home moms who stepped out of the workforce to be with their children can open and fund a Spousal IRA for tax year 2021. This IRA helps keep their retirement savings on track. Having one’s own “bucket of retirement money” is too important to ignore. Even though at-home moms are knee-deep caring for their children.
We know moms with young children have taken a beating over the last two years. But moms with infants and toddlers simply could not leave their tots alone when daycares closed. Parents with kids in elementary school were torn between working-from-home and helping with zoom school. It is an impossibly tall task.
And, we know the result. Nearly 3 million women came out of the workforce at the beginning of the COVID crisis. Today, there are still some two million women who have not returned to work. And, most of those women are moms with young children.
Long-term retirement implications
In cases where mom stopped working, the loss of her paycheck put millions of families on a tighter-than-usual budget. And, millions of women lost one, two, or now three critical retirement savings years. The moms choosing their children over their careers and 401(k)s have made a tremendous financial sacrifice. Both for current income needs and future retirement security.
These career-women-turned-at-home-moms-due-to-COVID have been short-shrifted. They lost years of savings and matching money into retirement accounts at work. They’re also taking a sizeable hit to their future Social Security benefits. Unless they ultimately choose to make up zero-dollar years with more years of working in their late-60s.
It’s easy to lose enthusiasm for staying financially focused when priorities are on the family. That’s where the Spousal IRA becomes so important. For the moms who are temporarily setting aside their paychecks and 401(k)s/403(b)s, the Spousal IRA is a financial path they can take.
It wasn’t around for the last generation of at-home moms, but it is available for any spouse who is the lower-wage-earner or the at-home parent.
We cannot let COVID rob moms of their future retirement security
The opportunity to save for retirement has lots of rules and time limits. The years anyone skips making a tax-advantaged contribution cannot be made up later. Furthermore, the math of compound interest didn’t change due to COVID. And dollar-cost averaging doesn’t work when new dollars don’t land in a retirement account each month.
So the remaining solution is the Spousal IRA. It is the one financial vehicle at-home moms (and at- home dads) can keep their retirement finances growing.
I believe IRAs are the single most important account a woman can have in her financial pocketbook. And, they are doubly important right now for the moms who have to be home due to COVID. Spousal IRAs allow at-home moms to keep up momentum in their retirement savings, even if they’re on a detour.
Sure, the IRA contribution limit is $6,000. Small relative to the 401(k)’s $20,500 deferral limit. But $6,000 is a heck of a lot bigger than $0. And, you’re right. The Spousal IRA may not be tax-deductible. Yet that should have no bearing on making annual contributions into these incredibly valuable accounts. IRAs are the gateway to a woman’s financial independence and freedom.
Why Spousal IRAs are more important than ever for lower-earning women
In a nutshell, they offer women who may have no other vehicle for saving for retirement financial ownership. Individual accounts—the “I” in IRA stands for “Individual”—mean control. Access. And ownership.
- Individual accounts – full and total ownership of the contributed dollars to only one person.
- Investment control – full and total ownership, decision-making, and management of the assets with no input from anyone else.
- Beneficiary decision control – full and sole decision-making on who will get these assets when the owner dies.
- Withdrawal decision control – full and sole discretion if and when to take out any money for any reason (at age 72, the IRS requires the owner to begin required minimum distributions in non-Roth IRAs).
- Rollover account established – sole owner of an established IRA that’s ready to accept any rollovers from 401(k)s and 403(b)s.
- Roth or Traditional decision control – Sure, a tax-deduction is nice, but it is not necessary for opening and funding IRAs. Tax-free Roth IRAs may better in years when household income is lower and opens more strategic options for retirement savings in future years. Non-deductible IRAs are still powerful ownership vehicles for women.
- SEP-IRA for gig-workers and self-employeds – Those who have found a way to juggle kids with some type of self-employment can save in an individual SEP-IRA and get a tax-deduction.
The glimmer of retirement hope
We are all so tired of COVID. It has especially wreaked havoc on households with kids. Moms with young children have borne the brunt of the pandemic. They’ve traded in careers and future financial security. Millions are losing key retirement savings years.
Let’s make sure this tax year all at-home moms and dads know they can take back some control. Open and fund a Spousal IRA at most any financial institution. Choose a traditional IRA if you can get an additional tax deduction. Or choose a Roth IRA. Either way, saving for your future during these COVID years is critical. The Spousal IRA gives moms a glimmer of hope for their future.
Setting up your Spousal IRA
It’s easy to set up a Spousal IRA. It is simply an IRA that you open and fund at most any financial company. Or through your financial advisor. You’ll open the account in your name and fund it from your household cash or savings.
Fidelity Investments offers IRAs, including spousal IRAs. T. Rowe Price includes an excellent graph highlighting the importance of saving for your retirement. And Schwab’s article highlights how older spouses can also take full advantage of the Spousal IRA.
Keep in mind, you don’t have to contribute the full $6,000. Making any sized contribution in your own IRA means financial ownership forever. Start with $500 for tax-year 2021. Start with $1,000. The key is to get that account opened and put some cash in it.
If you already have any kind of IRA, you can add funds to that account. Traditional or rollover IRAs can accept tax-deductible or non-deductible contributions. You just need to keep track on an IRS From 8606 if you make non-deductible contributions. Roth IRAs can only accept after-tax dollars.
While you are making a “prior year” contribution for 2021, think about setting up your 2022 “current year” contributions. It’s easy to set up auto-pays directly from your bank account. You can make monthly payments of say $50 or $100 a month. Or fully fund your 2022 IRA at $500 per month.
The Spousal IRA is one bit of good news in a sea of challenges brought on by COVID. Do take full advantage of the opportunity.
Take note: 2022 has different deadlines for IRAs vs. filing your taxes:
According to the IRS, the deadline to open an IRA and fund it with contributions for the 2021 tax year is April 15, 2022. There are a few sources out there saying you have until April 18th. Go with April 15th.
And really, make sure you are all set well before then. It takes time to process your application and move your money, even when you do it online. You don’t want to find out in May that your contribution missed the deadline for 2021.
Adding to the deadline confusion: 3 different tax deadlines this year. For most folks, the deadline to file your tax returns is April 18, 2022. Or April 19 in Massachusetts and Maine. For victims of the late 2021 Colorado wildfires and December tornadoes in parts of Illinois, Kentucky, and Tennessee, May 16, 2022 is your deadline.
You’ll be better set for tax-filing the sooner you get your taxes done. File early and online. So you can get back to enjoying other wonderful times of the year.
And for more information on the Spousal IRA, check out these articles:
- One of my original articles recognizing the women who made the Spousal IRA possible after a 20-year fight in Congress.
- The original article I wrote about the 25th Anniversary of the Spousal IRA on Retirement Daily at The Street.
- For another look at the Spousal IRA from NerdWallet and why it’s important for at-home parents and lower-wage spouses to have one.
- An important website for women, WISER Women, and additional facts about the Spousal IRA.