June 22, 2017
When you and your partner make the decision for one of you to be a stay-at-home parent, the tendency is to center all the financial decisions on the person who is still earning an income. Notice I didn’t say “the one who is still working.” Please. Being a stay at home parent is probably the hardest—and certainly the most important-work there is.
If your household has a stay at home parent, please make sure you have taken the following steps:
Purchase Term Life Insurance for the Stay-at-Home Parent. I am going to presume you have life insurance for the parent earning an income. But too often I find families that do not have any insurance for the at-home parent. If you have young kids that is a big mistake. I realize this may not be a cheery subject to ponder, but it is so very very important for the well-being of your children: If the stay-at-home parent were to die, how would the other parent care for the children? Might you need some extra help around the house, or an afternoon nanny to help with carpools to after-school activities? All that costs money.
Fund a Spousal IRA for the Stay At Home Parent. Every spouse, regardless of employment status can invest in an IRA. The only requirement is that the reported earned income on your federal tax return is at least equal to any annual contributions into an IRA. So for example, if both spouses are under the age of 50, each can contribute $5,500 into an IRA, as long as the reported earned income was at least $11,000. This year, as long as joint income is below $186,000, you can invest in a Roth IRA. While you won’t get an upfront tax break today, you get a tremendous payoff in retirement: withdrawals that are 100% tax-free.
Work Together on Long-Term Planning. So often I see households where the wife (especially the stay-at-home wife) handles the monthly bill paying, and the husband is in charge of the investing and planning decisions. I hate this arrangement. Wives end up getting blamed when there’s not enough money to pay the bills—as if it’s their fault!-and women end up being a bit clueless about major financial decisions that will impact their life. From how much is being saved for retirement, how that money is being invested, to whether there is sufficient life insurance. I am fine with couples dividing lead responsibility for certain financial jobs, but you both must be actively involved in monthly budgeting and long-term planning decisions. That means talking to each other, listening to each other, and working together to make sure you are both comfortable and confident in how your family’s finances are being handled.