The Dilemma of the Non-Working Woman

A broad-based coalition of industry and political groups, charging that U.S. tax law is discriminatory against women, is sponsoring a bill that would allow homemakers to boost contributions to individual retirement accounts.

Currently, non-working spouses can deduct just $250 in annual contributions to an IRA, contrasted with $2,000 in deductible contributions allowed for working people who are not covered by company pensions.

By and large, non-working spouses are women. And some members of the coalition maintain that “tax discrimination” is one of the reasons women are twice as likely as men to die in poverty.

However, others maintain that the financial deck is stacked against women in more ways than one. Because women are the primary care givers in families, they’re more likely to have their careers interrupted to tend to children or ailing parents. They earn less, on average, than their male counterparts. And they live about seven years longer than men, making it more likely that they will die poor or disabled.

In other words, the tax change, if successful, would address only one of women’s many money troubles.

But, law or no law, women can act now and significantly raise their chances of living out their golden years comfortably, experts say. Here’s how.

* Save. Homemakers without outside income rarely save money in their own names because they’re focused on doing nice things for others rather than for themselves, says Henry Zimmer, the Calgary, Canada-based co-author of “Becoming the Wealthy Woman.”

Women must learn to be a little bit selfish, Zimmer says. Take a small portion of each month’s housing allowance and put it in a bank account in your own name, he suggests. If necessary, ask for a housing allowance “raise” so you can build a nest egg of your own.

At least treat your retirement savings like you do all other household expenses, says Kathy Hopkins, executive vice president of Fidelity Investments in Boston. Realize that financing your retirement is a necessary expenditure, just like buying groceries or paying the mortgage. Pay yourself first.

* Start early. Women live longer than men, on average. That means they’ll need a larger savings account to finance a longer retirement. Since women also earn less than men on average, they probably cannot afford to simply save a larger amount of each month’s wages.

So what’s the answer? Save small, but start early. If you start saving $25 a month when you’re 20, you’ll have $131,863 when you’re 65, assuming an 8% average annual return. But if you wait until you’re 45 to start saving, you must save $224 a month to get the same result.

* Invest wisely. Women tend to invest more conservatively than men, putting more money in super-safe investments such as Treasury securities and federally insured certificates of deposit than in riskier corporate stocks. Some experts theorize that women do this because they’re less savvy about investing than men. Others say it’s because the investment world is biased against women, with brokers and financial planners offering women less information and advice. Whatever the reason, ultraconservative investing is the wrong tack, particularly for those who are starting early.

Why? While the stock market is risky and volatile over short periods, the market’s long-term performance is fairly consistent, according to Ibbotson Associates, a Chicago-based investment consulting firm.

Since 1926, large company stocks have earned a compounded average annual return of 10.33%. Small-company stocks have earned a compounded average annual return of 12.36%. Treasury bills, on the other hand, earned just 3.69% on average.

The bottom line: If you invested $1 in Treasury bills in 1926, you would have $11.73 today. If you invested that dollar in small-company stocks instead, you’d have $2,757, according to Ibbotson.

* Manipulate income. Not everyone will have this option, but homemakers who are married to self-employed men--or men who work at smaller, entrepreneurial firms--may have the ability to earn wages for helping their husbands, says Philip J. Holthouse, a partner with Holthouse Carlin & Van Trigt in Los Angeles. The impact on your husband’s company or his employer would be negligible. But the result for your family could be boosted retirement savings, he says.

Consider a hypothetical couple, John and Jane Brown. John earns $50,000 as marketing director for a small manufacturing firm that does not offer a company pension plan. Jane helps out by typing and editing John’s reports, but she earns no wages.

Under this arrangement, John can contribute $2,000 annually to an individual retirement account. But because Jane has no earned income, she can contribute only $250 annually to a “spousal IRA.” Together, the Browns get $2,250 in deductible IRA contributions.

What happens if John asks his employer to shift some of his income to Jane for the work she’s doing for John? Assuming the employer agrees, John’s income is divided, with John earning, say, $42,000 and Jane getting the remaining $8,000 for her part-time help. The Brown’s family income remains at $50,000 and the employer’s expenses are identical, except for a modest increase in bookkeeping.

But the Browns are surprisingly better off. Because both now have earned income, both qualify for $2,000 in tax-deductible IRA contributions.

Their boosted contributions save them $490 annually in federal and state taxes, assuming a combined 28% rate.

If the Browns earn 8% annually on their money over a 20-year period, they will have $196,340 in IRA savings. If they’d been able to contribute only the $2,250 annually--the maximum deductible contribution for a one-income family--they’d have $110,441 in 20 years.