Ask Money

Savings for a Stay-At-Home Mom

Chris Farrell Jan 3, 2008

Question: I’m currently not in the paying workforce while I take care of my infant son. Besides the obvious large loss of income, I’m concerned about my curtailed ability to contribute to my retirement funds. Are there avenues to move money into retirement funds beyond a $4000 IRA contribution?

Answer: This is a pet peeve of mine, and I don’t understand why Congress and the White House don’t combine forces to dramatically simplify the pension system and make it more equitable. The current private retirement savings system is capricious. It includes 401(k)s, 403(b)s, 457s, SIMPLEs, SEP-IRAs, IRAs, and Roth IRAs to name only the best-known plans. The rules, income limits, and restrictions vary significantly among most of these tax-advantaged savings programs.

For instance, if you were working at a company with a 401(k) you could set aside $15,500 in pre-tax dollars in 2007. An employee at a small company with a SIMPLE plan has $10,500 limit. A stay-at-home spouse running the family household can save at most $4,000 in an IRA. If you are over 50, the plan limits are somewhat higher in each case. But the overall disparity remains.

Why not attach the retirement-savings plan to the individual and have just one rule for everyone–say, 15% of income, or $30,000? The figure could be less or more. The key point is that the rules should be uniform. And the retirement plan system should include parity for working and “nonworking” spouses (an oxymoron if there ever was one).

All right, I’ll clamber off my soap box. But unless you bring in an income through freelance projects or a consulting business or some other income generating sideline that you run out of the house, you’re out of luck when it comes to the pension system.

But all is not lost. Here are a couple of suggestions. First, you could buy I-bonds from the Treasury. You buy them with after-tax dollars. You pay no commission costs. Your money compounds free of taxes until you cash them in (you’ll then pay your ordinary income tax rate on the gain). These bonds are specifically designed to protect your portfolio from the ravages of inflation. The dollar you put in to today will be worth a dollar plus interest 10 years, 20 years, or 30 years from now.

Another strategy is to set up an automatic payment account with a major mutual fund company and buy a broad-based equity index fund. You’ll outperform most professional money managers year-in and year-out by matching the underlying index, you’ll pay very little in fees, and your tax bite is limited compared to an actively managed mutual fund since there isn’t a portfolio manager constantly buying and selling stocks.

An alternative to an index fund is a tax’managed mutual fund–one that is run by the a pro with an eye toward minimizing Uncle Sam’s tax take. An added benefit to investing regularly in an index fund or a tax managed fund is that if you need the money before age 59 1/2 you can cash it in without paying the 10% surcharge attached to defined contribution savings plans like 401(k)s and 403(b)s.

In other words, you can make some long-term savings on your own that offer their own advantages even though the money isn’t in a pension plan.

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