Spouses who decide to stay home with their kids know that they will be making sacrifices. It’s difficult to put a career on hold and easily be able to pick it back up again several years later. And losing one parent’s income means money is tighter, which can often lead to strife and disagreements.
Most stay-at-home spouses are well aware of these potential pitfalls and are ready for them. What they might not know is that there are various financial rules pertaining to non-paycheck-earning spouses that can hurt or help their bottom line now and in the future.
If you’re thinking about taking some time away from your job in order to stay home with the kids, here is what you need to know:
Retirement and the Stay-At-Home Spouse
Many couples rely on the working spouse’s 401k savings for their retirement, which is a good way to protect both spouses’ retirement. Federal law requires a worker to get his or her spouse’s signature in order to name anyone other than the spouse as a beneficiary.
However, things get a little hairy when the working spouse changes jobs. At that time, the worker can cash out their 401k, and there is no requirement for spousal permission in order to cash out. In addition, if the worker were to roll over their 401k into an IRA, they would have the right to name anyone as beneficiary—without needing the spouse to sign off on it.
While no one expects to get divorced, a stay-at-home spouse can be very vulnerable to losing out on retirement savings in the event of divorce. One way stay-at-home spouses can protect themselves is to also set up an IRA in their own name. So-called spousal IRAs provide stay-at-home spouses with a method of saving for retirement even if they do not have their own income. These IRAs have similar contribution limits and tax benefits to traditional IRAs, and they are a critical component to financial security for non-working spouses.
One portion of this legislation requires credit card applicants to have their own income in order to qualify for a card. The intention behind this rule was to protect college students and others without income from opening credit cards they simply cannot afford. However, this regulation also has a major effect on stay-at-home spouses: it is now impossible for a spouse to have his/her own card with the working spouse as a co-signer.
Many feminists and stay-at-home parenting advocates were angered by the unintended consequences of this rule change, and so the Consumer Financial Protection Bureau has proposed changes to the law which will allow applicants over age 21 to rely on a third-party income to qualify for a credit card, provided they have reasonable expectation of access to that income. These proposed changes have not yet been approved.
The Bottom Line
Before deciding to stay home, both spouses need to sit down and talk about protecting their finances and building for the future, even with the loss of one paycheck. The first step is knowing what kinds of financial regulations can impact the non-working spouse.
Emily Guy Birken
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