Non working spouse retirement acct options

[steffmo]

What are some options for a non-working spouse's retirement account contributions (i.e. stay at home mom/dad)? My husband is in his first year as an attending making around $300K and has decent options for saving through his group (around $58K is required to be saved between defined contributions and defined benefit, but he can elect to save up to $79K/yr).

We have been fully funding a Roth IRA for him since med school and will now switch to the backdoor Roth IRA due to our income.  However, it is my retirement accounts that I am now wondering about.  I worked and supported us during med school, residency, and fellowship.  I'm now a stay at home mom.  I have $42K in a rollover IRA and $15K in a rollover Roth IRA from my work 401Ks (I didn't always have access to the Roth 401K option).

Since we can save upwards of $84K/yr in retirement accounts ($79K through work and $5500 backdoor Roth for him), I don't see a financial need to save more in my accounts but my question is - what if we want to?  What is my best option?  Our income is too high for deductible IRA and unless we want to pay upwards of $12K in taxes to convert my rollover IRA to Roth, the backdoor Roth option is out for me too.  So that leaves nondeductible IRA contributions or just using a taxable account.  Or am I missing an option? Is it worth paying the taxes to convert to a Roth?

Side note - all student loans were paid off during residency/fellowship.  No car loans. Only debt is $250K mortgage.

Thanks!

[jfoxcpacfp]

Wish you had converted to a Roth IRA when your DH was in residency! Here is the way I would assess your current situation:

• You are squarely in the 33% bracket so you'll save 1/3 (not counting any state/local taxes) on any dollars that go into tax-deferred accounts.


• Since you have another $21k of tax-deferred space you're not maxing out, I will presume you are not yet at the point you can afford to do so, which is not unusual for 1st-yr attending (but most have school loans, so good job).


• Any dollars you can free up for retirement should go into your husband's retirement plan. It's awesome that you can still defer another $21k, which will cost you only $14k.


• After you get there, then your husband should contribute to a back-door Roth.


• Then you should start contributing to an annual TIRA (non-deductible) and build the account until you can do a back-door conversion. (You may want to reverse order with prior step.)


• If you or your DH has an opportunity for any SE income, set up a SOLO-401k and roll your pre-tax TIRAs into it. If it's your income, it's simple. If it's your DH's income, he will need to hire you.


• I wouldn't be overly concerned about whose name is on the accounts at this point. If you divorce, you'll likely split them 50:50. The name of the game at this point is to 1) save as much as possible 2) as tax-efficiently as possible.


• Note that tax efficiency does not always mean a dollar saved today. It can mean a future dollar you won't have to pay taxes on (a Roth contribution). However, given your situation (33%+ tax bracket) and that you're just starting out, I would go for the tax savings until you have maxed out DH's tax-deferred space. Doing so should compound what you can contribute.


• In the next bear market (or during multiple dips of 15% or more), if you have not had the chance to convert your pre-tax IRAs to Roth IRAs, you should consider doing so. Be sure to work with a financial professional to help with the cost-benefit analysis as you make your decision.

[steffmo]

Thank you so much for the advice.  I think I am going to look more into converting the rollover IRA to Roth since it makes more financial sense in the long run, like you suggested.  I also think that we'll be able to contribute the entire $79K to my husband's retirement account starting next year.  We just want to be able to build up a nice cash cushion first.  Again, thanks for your time!

[jfoxcpacfp]

Glad I could help!

[Tashfeen]

This is very informative answer.

My wife is a stay at home mom. This past year she did some minimal contractor work so that we could open a 401k to roll over her IRAs into it. Now, we can do back door Roth for her.

I would like to maximize her retirement. What other options do we have? Based on the internet, it seems like we can not do a maximum 401k contribution of 18k for her assuming her self employed income is less than that? You suggested above the husband hiring the wife? Could I pay my wife an income for home schooling and then be able to contribute?

[jfoxcpacfp]

Tashfeen wrote:

Could I pay my wife an income for home schooling and then be able to contribute?

Click to expand...

That is an interesting question (good creative skills!) but I'm afraid not, same as that you can't pay her for cleaning the house and cooking the meals. She is not in the trade or business of home schooling. Now if she taught other children for pay, it would be different, but you'd probably have some legal issues and the teachers' union to deal with (that is a total supposition on my part).

Of course, you don't have to use a government-blessed account to save for retirement. Taxable accounts have many advantages and should be included in any family's plan. Just be sure you have plenty of umbrella insurance.

 

[mitochondria]

Agree with Johanna. I converted $10K each of my spouse's and my TIRA to a ROTH and I ended up paying an extra $6K-$7K in taxes for what turned out to be $20K of conversion.

I'm a bit of a contrarian in that I still max out a 403b ROTH account despite being 52 years old with $280K income.  Most folks take the view (rightfully so) that this is the wrong move tax wise.  However, I don't see myself avoiding the 28% marginal tax bracket in retirement so I assume the risk of paying too much taxes for now at the 33% marginal rate believing that the compound growth will be greater than the extra 5% I pay now in taxes and I will owe no taxes on that amount later down the road.  For the record, my wife (also a physician in her early 50s and soon to be retired) disagrees with my forecast of the future and she continues to contribute to a pre-tax 403b with her salary.

[adventure]

jfoxcpacfp wrote:

Wish you had converted to a Roth IRA when your DH was in residency! Here is the way I would assess your current situation:

• You are squarely in the 33% bracket so you’ll save 1/3 (not counting any state/local taxes) on any dollars that go into tax-deferred accounts.


• Since you have another $21k of tax-deferred space you’re not maxing out, I will presume you are not yet at the point you can afford to do so, which is not unusual for 1st-yr attending (but most have school loans, so good job).


• Any dollars you can free up for retirement should go into your husband’s retirement plan. It’s awesome that you can still defer another $21k, which will cost you only $14k.


• After you get there, then your husband should contribute to a back-door Roth.


• Then you should start contributing to an annual TIRA (non-deductible) and build the account until you can do a back-door conversion. (You may want to reverse order with prior step.)


• If you or your DH has an opportunity for any SE income, set up a SOLO-401k and roll your pre-tax TIRAs into it. If it’s your income, it’s simple. If it’s your DH’s income, he will need to hire you.


• I wouldn’t be overly concerned about whose name is on the accounts at this point. If you divorce, you’ll likely split them 50:50. The name of the game at this point is to 1) save as much as possible 2) as tax-efficiently as possible.


• Note that tax efficiency does not always mean a dollar saved today. It can mean a future dollar you won’t have to pay taxes on (a Roth contribution). However, given your situation (33%+ tax bracket) and that you’re just starting out, I would go for the tax savings until you have maxed out DH’s tax-deferred space. Doing so should compound what you can contribute.


• In the next bear market (or during multiple dips of 15% or more), if you have not had the chance to convert your pre-tax IRAs to Roth IRAs, you should consider doing so. Be sure to work with a financial professional to help with the cost-benefit analysis as you make your decision.

Click to expand...

You are kind to be so helpful here in this community.

[jfoxcpacfp]

adventure wrote:

You are kind to be so helpful here in this community.

Click to expand...

Thank you, @adventure - I appreciate that. Of course, to be honest, it helps my business, but I truly enjoy passing along what I've learned over time. Hope that doesn't come off too saccharine 

[jfoxcpacfp]

mitochondria wrote:

Agree with Johanna. I converted $10K each of my spouse’s and my TIRA to a ROTH and I ended up paying an extra $6K-$7K in taxes for what turned out to be $20K of conversion.

I’m a bit of a contrarian in that I still max out a 403b ROTH account despite being 52 years old with $280K income.  Most folks take the view (rightfully so) that this is the wrong move tax wise.  However, I don’t see myself avoiding the 28% marginal tax bracket in retirement so I assume the risk of paying too much taxes for now at the 33% marginal rate believing that the compound growth will be greater than the extra 5% I pay now in taxes and I will owe no taxes on that amount later down the road.  For the record, my wife (also a physician in her early 50s and soon to be retired) disagrees with my forecast of the future and she continues to contribute to a pre-tax 403b with her salary.

Click to expand...

Another issue you may want to consider is estate planning. In my experience, what typically happens is that the parents get to retirement and continue to hoard the Roth, at least to a degree. It's fun to watch that tax-free savings continue to multiply. And it's a great perk to pass along to the next generation since they will pay tax at their top marginal brackets on inherited TIRAs.