Saving for retirement while raising kids is tough.  But spending money on your kids at the expense of your retirement can be a recipe for disaster when you get older.  Planning for retirement is critical to your financial future.

Maximizing your contributions to tax-deferred retirement accounts, like IRAs and 401(k)s, can go a long way toward ensuring a comfortable retirement.  As a married couple, it’s important to coordinate your contributions to get the greatest tax benefits.

How Much Can a Couple Save For Retirement?

The amount that you may save annually in tax-advantaged accounts is limited by several factors, including your access to an Employer plan (such as a 401(k)) and your income. It’s important to come up with a plan as a couple to maximize your pre-tax contributions to these accounts.  Opportunities are often missed when spouses think of their retirement savings individually, instead of together.

Avoid the mistakes below by putting in place a comprehensive retirement plan for your family as a whole.

The examples used are based on a fictional couple, Amy and Jamie.  Amy’s income is $200,000 and Jamie’s is $30,000.  Jamie is currently working part-time while their kids are young.  He may go back to full time in a few years when they are both in school.

Mistake #1: Saving in Only One Retirement Account

Amy intends to put 10% of her salary into her 401(k).  Ten percent of $200,000 ($20,000) is greater than the IRS maximum contribution for 2016 ($18,000), so her payroll deductions stop when she reaches the maximum contribution amount (in this case, probably sometime in October).

Jamie has a 401(k) at work but feels like he isn’t making enough to contribute right now.  So he doesn’t make any contribution.

• Total Retirement Contribution for the Year: $18,000
• Total Potential Contribution for the Couple: $36,000

From a financial planner’s perspective, this is a missed opportunity.  There may have been a tax advantage to saving more for retirement for the year for the couple.  It also doesn’t quite seem “fair” that Amy’s retirement accounts are receiving additional contributions and Jamie’s are not.

Mistake #2: Saving Based on an Arbitrary Percentage

Amy and Jamie come up with a plan to save 10% of their income for retirement.

Amy puts 10% of salary into her 401(k), which again tops out at $18,000.

Jamie also put 10% in his 401(k).  At his current salary, that is $3,000 for the year.

That 10% savings rate is a rule of thumb that many have heard and follow.  It’s definitely a step in the right direction, but why not raise the percentage, especially since Amy was prepared to put in another $2,000? (10% of $200,000 was $20,000) if she had been permitted under the plan rules.

• Total Contribution for the Year: $21,000
• Total Potential Contribution: $36,000

Increasing Jamie’s contribution to $18,000 feels strange – after all, it’s more than 50% of his salary! (That percentage may not be allowed by his company plan.) However, it’s to your family’s benefit to look at your retirement planning as a couple rather than as an individual.  And, if you file your taxes jointly, the tax benefits are shared.

Mistake #3: Not Setting Up a Retirement Account for Your Business

Suppose Amy is an independent contractor, but still makes $200,000.  She doesn’t have a 401(k) at work, so she saves nothing (for retirement, anyway).  However, she could open a SEP IRA and save up to 25% of her income, up to a maximum contribution of $53,000 in 2016. 

Jamie is still putting in 10%, for a total contribution of $3,000 for the year.

• Total Contribution for the Year: $3,000
• Total Potential Contribution: $56,000

Mistake #4: Failing to Take Advantage of a Spousal IRA Contribution for a Stay-at-Home Parent

Suppose Jamie takes time off from work to take care of the kids, and has no income for the year.

Amy plans to put 10% of her salary into her 401(k), which again tops out at $18,000.  Since Jamie isn’t employed, he has no income to contribute to a retirement account.

In this situation, Amy could make a spousal contribution of $5,500 to an IRA for Jaimie.

• Total Savings without the spousal contribution: $18,000
• Total Potential Contribution: $23,500

In Summary

You may be able to save more than you think in your retirement accounts, and it’s to your family’s benefit for both parents to work together to maximize total retirement savings.  For more specific questions about the tax treatment of retirement savings, visit this IRS webpage.

Are you maximizing your retirement savings this year?

Please note, changes in tax laws may occur at any time and could have substantial impact upon each person’s situation.  You should discuss tax or legal matters with the appropriate professional.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. 

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing is accurate or complete.  The example mentioned above is for illustrative purposes only.  Actual results will vary.