When you and your spouse are saving for retirement, you are probably looking for ways to invest as much money as possible for a comfortable retired life. But since most retirement plans require you to have an income before you can contribute any money, it may seem like you are at a disadvantage if one spouse does not work.
However, you are not necessarily at a loss if you or your spouse chooses to take care of the home or raise children instead of working. A spousal IRA can help you save on behalf of a non-working spouse.
What is a Spousal IRA?
In general, an IRA (Individual Retirement Account) requires you to earn an income to contribute to your retirement account. But the spousal IRA has been created as an exception to this rule for non-working people.
Under a spousal IRA, a working spouse can contribute to a retirement account for a non-working spouse. So, if you are a married couple filing taxes jointly, you are qualified to start a spousal IRA. However, keep in mind that this is not a joint account. Each IRA is set under an individual spouse.
Example of a Spousal IRA
A practical example of a spousal IRA will give you a better understanding of how this works.
Let us assume there is a 40-year-old couple named Chris and Jessica who opened their Roth IRA before getting married. While Jessica is a stay-at-home mom taking care of the house, Chris earns more than $100,000 yearly. They save around $12,000 in their IRAs and plan to equally split their contributions between their Roth IRA accounts, making it $6,000 each.
This is how a spousal IRA works. You can contribute about $6,000 yearly and additional catch-up contributions.
Why Should You Consider a Spousal IRA?
For a spouse who is not active in the workforce, a spousal IRA can be an important investment for their retirement. Women who take a break from the field to raise their kids are benefitted through this account. They have shown to maintain a lower IRA than men, and hence, a spousal IRA can become a perfect bridge to curb this gap.
How Does a Spousal IRA Work?
There is no special IRA type meant for spouses. A spousal IRA is your ordinary retirement account that can be used by a married couple with one non-earning member.
The couple can use a Roth, traditional, or both IRAs, and they are subjected to the same contribution limits, catch-up provisions, and income limits. To qualify for a spousal IRA, the couple should file taxes jointly.
There are tax advantages depending on which IRA you choose. Couples enjoy an additional tax break time up to $2,000 through saver’s credit.
What Are the Rules of a Spousal IRA?
Like any other retirement account, opening a spousal IRA comes with a set of rules.
- The account owner of the IRA does not change. Keep in mind that a spousal IRA is not a joint account. Each spouse opens their own IRA under their own name which makes asset allocations, beneficiaries, etc., belong to the IRA’s owner.
- The couple that contributes to the spousal IRA should file their taxes jointly.
- The IRS follows a strict income limit. In 2022, you cannot pay a full contribution to your Roth account if you earn more than $204,000, based on your Modified Adjust Gross Income (MAGI). However, if you earn under $214,000, you are eligible for a partial deduction.
- There is no age limit on spousal IRA contributions as long as one spouse is earning.
Types of Spousal IRA: Traditional IRA vs Spousal Roth IRA
As mentioned earlier, there is no such thing as a spousal IRA separately. It is your normal IRA. But the thought behind this is to help your non-working spouse have the security of retirement savings.
Since it is an individual account, you and your spouse can set up either a traditional IRA, a Roth IRA, or both. Here is what you need to know about your options:
- Traditional Spousal IRA: If you plan to open a traditional spousal IRA, there is an age limit. You or your spouse need to be below 70 ½ at the beginning of your contributing year. Moreover, the traditional IRA works on the pre-tax model. The taxes on your contributions are not immediately deducted, but instead, they are deducted when you withdraw money from your IRA.
- Spousal Roth IRA: A Roth IRA does not have any age limits for contributions. Hence, you and your spouse can open one at any time in your lives. However, there is an income limitation, so you cannot open this account if you earn above the set income limit. The biggest benefit of a spousal Roth IRA is that the income tax is deducted as soon as you contribute. So, you can withdraw the money tax-free.
What Are the Advantages of a Spousal IRA?
As a couple with only one actively earning member, a spousal IRA proves to be an excellent way to boost your retirement savings! Moreover, you get various investment choices that range from individual stocks and bonds to exchange-trade and mutual funds.
How to Open a Spousal IRA?
Opening a spousal IRA is easy. Every IRA broker or advisor offers IRAs and Roth IRAs for you and your spouse. They will need the account holder’s personal information like name, Social Security Number, and birthdate. After opening the account, you can immediately start funding it for your future!
Choosing the Right Spousal IRA
When selecting the right IRA for your spouse, you might want to consider a few different things. First, look at your own retirement plan and how much you are saving. Based on this information, set goals for what you would like to save for your spouse. What plan will help you achieve those goals?
You will also want to consider outside factors, such as the cost-of-living adjustments for certain retirement plans. These adjustments may change depending on how much you can contribute to your retirement funds, so be aware of how they are changing or growing.
A spousal IRA makes a huge difference when it comes to retirement savings. If you have a spouse who is not working and does not plan to go back to work, consider what a spousal IRA could do for you and your retirement nest egg.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.