Expert: Gina Boykin - 8/21/2008

Question
I currently am married, have one child, work part time, and I would like to start saving for retirement.  My husband has a 401k with his company.  I feel it's important for me to have my own retirement income.  We plan to have another child in the next year or so.  What would be the best retirement savings option for me if I were to stop working for at least 5 years while I raised the children?
Thanks,
JP

Answer
You actually have several options, while you are working and when you stay at home.

Option 1 - Traditional IRA
Since you are married and don't participate in a retirement plan, but your husband does, you are allowed to make a deductible IRA contribution if your joint AGI is below $166,000. You must file a joint tax return to do this.

Option 2 - A nondeductible IRA
Anyone can open a nondeductible IRA regardless of income.  This means you can't deduct it on your tax return, though.  You do get the benefits of tax-deferral.  You don't pay taxes until you withdraw the money in retirement.

An IRA gives you a tax break now but you pay taxes later.  The amount you contribute goes on your tax return and reduces the amount you owe in that year.  Later, when you take money out in retirement, you will pay taxes on the entire amount of your withdrawal just as if it was a paycheck.  

Option 3 - Roth IRA
A Roth IRA is really the best retirement plan option for anyone.  In a Roth, you don't get a tax break now.  HOWEVER, all of your earnings are TAX-FREE!  That means that if you contribute $10,000 and it grows to $100,000 over the next 20 years, you don't pay any taxes on this $90,000 worth of growth.  To qualify for a Roth IRA, your modified adjusted gross income must be below $169,000 in 2008.

The other benefit of a Roth IRA is that you can withdraw your contributions (but not your gains) without paying penalties or taxes.  So in my example above, if you needed that $10,000 a few years after you opened the account, you could take it out easily.  It would be available for extreme emergencies.

For these options, you must have "earned" income.  This means that you can contribute while you are working part-time but would not be able to contribute when you stop working.

You can contribute up to $5,000 a year for any of these options.

There is another option for stay-at-home moms.  It is called a 'Spousal IRA'.  The money you invest in the IRA can come from the income your husband earns, but the account will be in your name only (not his name or joint).  A Spousal IRA can be either a Traditional IRA or a Roth IRA.

Whatever option you chose, you can open up an account with a discount brokerage firm such as Fidelity or Vanguard.  If you are not sure where you should invest your money, start learning at websites like investopedia.com or even Wikipedia.  Learn about ETF's (exchange traded funds) and index funds because these are one of the easiest funds to understand and the cheapest to own.

I would also suggest that you have sufficient savings and an emergency fund.  This money can be in a combination of savings accounts, money-market accounts, and certificates of deposits.  

If you take the steps toward having savings and retirement for yourself, you are better able to take care of others.  I think it is great that you taking that first step!