What are our options if my wife cannot max out on her 401k?

Question

If my wife stays home for most of the year and does not work very much, she will probably not max out on her 401k. Does that give us any more investment options such as putting money in a traditional or Roth IRA, etc.? Thanks.

Answer 1

1)  Put some money in her IRA.  Either a traditional or Roth IRA if you are qualified.  Even if you are not, you can still put money in a nondeductable IRA and convert to a Roth IRA in a few years when the tax laws change.

2) Put money in a college 529 plan.  (Assuming you plan on kids going to college and haven't maxed out on tuition savings.)

3) Consider hiring a babysitter if your wife is interested in working a few more hours.  Just think about it.  The first $15k that she earns will be nearly tax free.  How cool is that?  If she makes $50 an hour, that means she can work almost 40 days without paying federal or state income taxes.  You could even consider taking a day off to watch the kids so she can work, and you might still break even if you make $80 or less an hour. (There are still social security and medicare taxes, but you get the point.)

Answer 2

Go for the Roth IRA as well as the 401(k).  If your wife (and you too!) each put the maximum contribution into a Roth IRA each year starting at age 30 then you will (each) have over $1.2 million at age 65 assuming a 9% average return. AND that money is tax free.  Not bad getting $1.2 million tax free for an investment over 35 years that totals $190,000.

Answer 3

Hi, you do have options.  You can always fund an IRA (Roth or Regular) for 2008 up to $5,000 and $6,000 if you are 50 or older for your wife as long as at least one of you made $5,000 in earned income.  A Roth is a better option then a regular IRA because contributions to a regular IRA in your case are not tax deductible since you are in a qualified plan (401k) for 2008.  Contributions to a Roth are after tax but, tax free withdrawal after 59 1/2 years of age.  You can always take out your principal tax free i.e., what you put in originally.